Citizens for Fair REU Rates v. City of Redding

Filed 1/20/15
CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
THIRD APPELLATE DISTRICT
(Shasta)
----

CITIZENS FOR FAIR REU RATES et al.,

Plaintiffs and Appellants, C071906

v. (Super. Ct. Nos. 171377,
172960)
CITY OF REDDING et al.,

Defendants and Respondents.

APPEAL from a judgment of the Superior Court of Shasta County, William D.
Gallagher, Judge. Reversed with directions.

McNeill Law Offices and Walter P. McNeill for Plaintiffs and Appellants.

Colantuono & Levin, Colantuono, Highsmith & Whatley, Michael G. Colantuono,
Amy C. Sparrow and Michael R. Cobden for Defendants and Respondents

Braun Blaising McLaughlin Smith, C. Anthony Braun and Justin C. Wynne for
California Municipal Utilities Association as Amicus Curiae on behalf of Defendants and
Respondents; Jarvis, Fay, Doporto & Gibson, Benjamin P. Fay and Rick W. Jarvis for
League of California Cities and the California State Association of Counties as Amicus
Curiae on behalf of Respondent, City of Redding.

1
 California voters adopted Proposition 13 in 1978 (Cal. Const., art XIII A, added
by Prop. 13, as approved by voters, Primary Elec., June 6, 1978)1 to require -- among
other constitutionally implemented tax relief measures -- that any “special taxes” for
cities, counties, and special districts be approved by two-thirds of voters. (Art. XIII A,
§ 4.) In 1996, voters adopted Proposition 218 (art. XIII D, added by Prop. 218, as
approved by voters, Gen. Elec., Nov. 5, 1996 (Proposition 218)), with one of its aims
being “to tighten the two-thirds voter approval requirement for „special taxes‟ and
assessments imposed by Proposition 13.” (Brooktrails Township Community Services
Dist. v. Board of Supervisors of Mendocino County (2013) 218 Cal.App.4th 195, 197
(Brooktrails).) To this end, Proposition 218 added article XIII C to require that new
taxes imposed by a local government be subject to two-thirds vote by the electorate.
(Art. XIII A, § 4; art. XIII C, § 1, as approved by voters, Gen. Elec., Nov. 5, 1996; see
also 2B West‟s Ann. Cal. Codes (2013) pp. 362-363.) Article XIII C was amended by
the voters in 2010 when they passed Proposition 26. (Art. XIII C, § 1, amended by
Prop. 26, as approved by voters, Gen. Elec., Nov. 2, 2010 (Proposition 26).)
Proposition 26 added subdivision (e) to section 1 of article XIII C, broadly
defining “tax” to include “any levy, charge, or exaction of any kind imposed by a local
government.” (Art. XIII C, § 1, subd. (e).) Subdivision (e) incorporated seven
exceptions to this definition of tax. (Ibid.) The second exception is the subject of this
appeal and provides that “tax” does not include “[a] charge imposed for a specific
government service or product provided directly to the payor that is not provided to those
not charged, and which does not exceed the reasonable costs to the local government of
providing the service or product.” (Art. XIII C, § 1, subd. (e)(2), italics added.) Section
1 of article XIII C further provides that “[t]he local government bears the burden of

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1 Undesignated references to articles are to the California Constitution.

2
proving by a preponderance of the evidence that a levy, charge, or other exaction is not a
tax, that the amount is no more than necessary to cover the reasonable costs of the
governmental activity, and that the manner in which those costs are allocated to a payor
bear a fair or reasonable relationship to the payor‟s burdens on, or benefits received from,
the governmental activity.” (Art. XIII C, § 1 [last para.].)
This case calls us to consider whether Proposition 26 applies to a practice by the
City of Redding (Redding) of making an annual budget transfer from the Redding
Electrical Utility (Utility) to Redding‟s general fund. Because the Utility is municipally
owned, it is not subject to a one percent ad valorem tax imposed on privately owned
utilities in California. (Art. XIII, § 3, subd. (b), adopted by voters, Gen. Elec., Nov. 5,
1974.) However, the amount transferred between the Utility‟s funds and the Redding
general fund is designed to be equivalent to the ad valorem tax the Utility would have to
pay if privately owned. Redding describes the annual transfer as a payment in lieu of
taxes (PILOT). The PILOT is not set by ordinance, but is part of the Redding biennial
budget.
Plaintiffs in this case (Citizens for Fair REU Rates, Michael Schmitz, Shirlyn
Pappas, and Fee Fighter LLC) challenge the PILOT on grounds it constitutes a tax for
which article XIII C requires approval by two-thirds of voters. Redding responds the
PILOT is not a tax, and if it is a tax, it is grandfathered-in because it precedes the
adoption of Proposition 26.
We conclude the PILOT constitutes a tax under Proposition 26 for which Redding
must secure two-thirds voter approval unless it proves the amount collected is necessary
to cover the reasonable costs to the city to provide electric service. We reject Redding‟s
assertion the PILOT is grandfathered-in by preceding Proposition 26‟s adoption. As a
budget line item, the PILOT is subject to annual discretionary reauthorization by
Redding‟s city council. The PILOT does not escape the purview of Proposition 26

3
because it is a long-standing practice.2 Because the trial court concluded the PILOT was
reasonable as a matter of law, we reverse and remand 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).
BACKGROUND
Redding’s PILOT
The facts of this case are undisputed.3 Redding owns a municipal utility to
provide electric service for residents and commercial businesses within the city. The
Utility owns property to generate and transmit electricity. This municipally owned
property is not subject to taxation. (See generally, art. XIII, § 3, subd. (b).)
In 1987, Redding‟s director of finance proposed a PILOT to transfer funds from
the Utility to the city‟s general fund. The director of finance noted 17 other cities
regularly made PILOT transfers and a PILOT in Redding “would generate $1,531,622.45
for the General Fund.” However, the proposal included a cautionary statement contained
in a legal advisory letter to the Northern California Power Agency, a consortium of
municipal electric utilities including Redding‟s Utility. The legal advisory letter
concluded that so long as the internal fund transfer had a rational basis or was equal to or
less than market rates, there was little risk of invalidation. However, the letter also
warned of “a real possibility that rates which produce revenues in excess of cost of

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2 PILOTs are not uncommon among California municipalities. (See, e.g., Howard
Jarvis Taxpayers Assn. v. City of Fresno (2005) 127 Cal.App.4th 914, 917 (Fresno)
[noting PILOTs used in Fresno since 1957 charter provision and 1967 ordinance].) We
do not consider or address the validity of any PILOT other than the one presented in this
case.
3 Given the undisputed nature of the facts and sufficiency of the appellate record,
we deny all pending motions for judicial notice.

4
service will require a two thirds vote of the affected electorate to be valid under
Propositions 13 and 62, or that such excess revenues will be subjected to the expenditure
limitations of Proposition 4.”
Redding adopted the PILOT in 1988.
As noted above, California voters adopted Proposition 26 in the general election
November 2, 2010. The next month, in December 2010, Redding passed a resolution
(No. 2010-179) increasing electric rates by 7.84 percent effective January 2011, and an
additional 7.84 percent effective December 2011. There is no line item in the electric
bills sent to the Utility‟s customers that reflects the PILOT.
The First Action
On February 4, 2011, plaintiffs filed a petition for writ of mandate and complaint
for declaratory and injunctive relief. Plaintiffs‟ first petition and complaint focused on
Resolution No. 2010-179, which the Redding City Council passed in December 2010 to
increase the Utility‟s rates. One of the stated purposes for the Resolution was “to obtain
funds necessary to maintain such intra-City transfers as authorized by law.” Plaintiffs
alleged the new rates incorporated the PILOT charge (about $6,000,000), which did not
reflect “any particular costs or expenses incurred” to provide electric service, but was
“purely extra revenue.” They alleged that because the PILOT was an invalid tax, the rate
increase calculated based on the PILOT was also invalid. Plaintiffs asserted the PILOT is
an unlawful tax that is “in excess of the reasonable cost of providing services, due to the
unlawful incorporation of the PILOT charge and transfer to [Redding]‟s general fund.”
Redding demurred, raising three general claims: First, Proposition 26 was not
retrospective and therefore did not apply to any aspect of the PILOT charge; second,
utility rates were not “imposed” because anybody was free to provide their own
electricity rather than pay the Utility for a supply; third, a utility charge was not a “tax”

5
within the meaning of Proposition 62.4 The trial court denied the demurrer and the case
proceeded to a bench trial.
The trial court denied the first petition based on its conclusion the PILOT charge
predated and therefore was immune from a Proposition 26 challenge. “The PILOT was
an established cost that was not increased or affected by the adoption of Resolution 2010-
179 [raising rates]. As the rate increases did not increase the PILOT, the Court finds that
the Resolution did not impose or increase any tax, and therefore did not require voter
approval.”
The Second Action
On August 29, 2011, plaintiffs filed a second complaint, seeking a declaration that
a new two-year budget adopted on June 22, 2011, violated Proposition 26. The Redding
City Council passed Resolution No. 2011-111 to adopt the biennial budget for the fiscal
years ending June 30, 2010, and June 30, 2011. The Resolution explains that “the City
Council has approved continuation of the PILOT in every budget since 1988-89. Upon
adoption of the [fiscal year] 1992-1993 budget, the City Council amended the PILOT to
include the value of capital improvement projects undertaken during the budget year in
the asset base to which the 1% [PILOT] is applied. Upon adoption of the [fiscal year]
2002-2003 budget, the City Council further revised the PILOT to adjust the value of
assets for inflation in the calculation of the PILOT. Upon adoption of a two-year budget
in June 2005, the City Council amended the PILOT into its current form by including the
value of joint-venture assets in which [the Utility] has a share in the asset base to which
the 1% [PILOT] is applied. The City‟s practice is to estimate the value of the assets over

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4 Proposition 62 “is a statutory initiative adopted by the voters at the 1986 General
Election. It added a new article to the Government Code (§§ 53720–53730) requiring
that all new local taxes be approved by a vote of the local electorate.” (Santa Clara
County Local Transportation Authority v. Guardino (1995) 11 Cal.4th 220, 231.)

6
the life of a two-year budget and to calculate the PILOT based on that estimate and to
correct any variance between the PILOT calculated for the last two-year budget and the
actual asset value experienced in that time. Estimates are necessary because the PILOT
formula: (i) includes capital projects to be completed in the two future years covered by
a [PILOT] and (ii) uses an estimate of inflation during that time.” Thus, Redding‟s
biennial budget incorporated “a marked increase” in the PILOT that was “due to the
addition of the Unit Six generator . . . .”
Consolidation and Trial Court Decision
By stipulation, the trial court consolidated the two actions. The trial court then
issued a memorandum of decision in favor of Redding. The trial court concluded the
PILOT transfer was not a new, increased, or extended tax under Proposition 26, and
therefore was grandfathered-in. After reaching this conclusion, the trial court went on to
address additional issues. In this part of the decision, the trial court also found that “even
if” the PILOT fell within Proposition 26‟s ambit, it could reasonably be argued the
PILOT reflected a reasonable cost of providing electric service.
Plaintiffs timely appealed from the ensuing judgment for Redding.
DISCUSSION
I
Proposition 26’s Application to Redding’s PILOT
We begin by considering whether the PILOT constitutes a tax under Proposition
26. If the PILOT is not a tax under Proposition 26, there is no need to consider whether it
is grandfathered-in. Plaintiffs contend the PILOT is a tax because it is not based on any
calculation of reasonable costs to Redding for providing electric service. In support,
plaintiffs note the PILOT is intended to replicate the tax that would be imposed if the
Utility were privately owned.

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 A.
Standard of Review
The question of “whether impositions are „taxes‟ or „fees‟ is a question of law for
the appellate courts to decide on independent review of the facts.” (Sinclair Paint Co. v.
State Bd. of Equalization (1997) 15 Cal.4th 866, 874 (Sinclair Paint).) Consequently, our
review affords no deference to the trial court‟s conclusions of law. We are, however, not
rudderless in our inquiry into the applicability of Proposition 26 to the PILOT in this
case. Instead, we aim to construe Proposition 26 to discern the intent of the voters who
adopted the initiative. “ „In interpreting a voter initiative . . . , we apply the same
principles that govern statutory construction. (See Horwich v. Superior Court (1999) 21
Cal.4th 272, 276 (Horwich).) Thus, “we turn first to the language of the statute, giving
the words their ordinary meaning.” (People v. Birkett (1999) 21 Cal.4th 226, 231
(Birkett).) The statutory language must also be construed in the context of the statute as a
whole and the overall statutory scheme [in light of the electorate‟s intent]. (Horwich,
supra, 21 Cal.4th at p. 276, [280].) When the language is ambiguous, “we refer to other
indicia of the voters‟ intent, particularly the analyses and arguments contained in the
official ballot pamphlet.” (Birkett, supra, 21 Cal.4th at p. 243.)‟ (People v. Rizo (2000)
22 Cal.4th 681, 685 (Rizo).) [¶] In other words, our „task is simply to interpret and apply
the initiative‟s language so as to effectuate the electorate‟s intent.‟ (Hi–Voltage Wire
Works, Inc. v. City of San Jose (2000) 24 Cal.4th 537, 576 (Hi–Voltage) (conc. & dis.
opn. of George, C.J.).)” (Robert L. v. Superior Court (2003) 30 Cal.4th 894, 900-901.)
B.
Taxes, Fees, and Exceptions under Proposition 26
Determining whether a levy, charge, or exaction qualifies as a tax or fee often
presents a subtle question. As the California Supreme Court has observed, “cases
recognize that „tax‟ has no fixed meaning, and that the distinction between taxes and fees

8
is frequently „blurred,‟ taking on different meanings in different contexts. (Russ Bldg.
Partnership v. City and County of San Francisco [(1987)] 199 Cal.App.3d [1496,] 1504;
Terminal Plaza Corp. v. City and County of San Francisco (1986) 177 Cal.App.3d 892,
905; Mills v. County of Trinity (1980) 108 Cal.App.3d 656, 660; County of Fresno v.
Malmstrom (1979) 94 Cal.App.3d 974, 983–984.) In general, taxes are imposed for
revenue purposes, rather than in return for a specific benefit conferred or privilege
granted. (Shapell Industries, Inc. v. Governing Board (1991) 1 Cal.App.4th 218, 240;
County of Fresno v. Malmstrom, supra, 94 Cal.App.3d at p. 983 [„Taxes are raised for the
general revenue of the governmental entity to pay for a variety of public services‟].)
Most taxes are compulsory rather than imposed in response to a voluntary decision to
develop or to seek other government benefits or privileges. (Shapell Industries, Inc. v.
Governing Board, supra, 1 Cal.App.4th at p. 240; Russ Bldg. Partnership v. City and
County of San Francisco, supra, 199 Cal.App.3d at pp. 1505–1506; see Terminal Plaza
Corp. v. City and County of San Francisco, supra, 177 Cal.App.3d at p. 907.) But
compulsory fees may be deemed legitimate fees rather than taxes. (See Kern County
Farm Bureau v. County of Kern (1993) 19 Cal.App.4th 1416, 1424.)” (Sinclair Paint,
supra, 15 Cal.4th at p. 874.)
In contrast to taxes that serve to raise general revenue, fees “ „do not exceed the
reasonable cost of providing services necessary to the activity for which the fee is
charged and which are not levied for unrelated revenue purposes.‟ ” (Apartment Assn of
Los Angeles County, Inc. v. City of Los Angeles (2001) 24 Cal.4th 830, 843, quoting
Sinclair Paint, supra, 15 Cal.4th 866, 876 [collecting authority].) A levy, charge, or
exaction cannot be considered a fee if “the amount of the fees [bears] no reasonable
relationship to the social or economic „burdens‟ its operations generated.” (Apartment
Assn, supra, at p. 881.)

9
 The issue of whether the PILOT in this case constitutes a tax or a fee arises only
after the adoption of Proposition 26 because Proposition 218 previously excluded fees for
gas and electrical service from the voter approval requirement. (Compare art. XIII C, §
1, subd. (e) [definition of “tax” to include “any levy, charge, or exaction of any kind
imposed by a local government” added by Proposition 26, italics added], with art. XIII D,
§ 3, subd. (b) [Proposition 218‟s exemption of electrical and gas service from its
provisions].)
Proposition 26 was intended to address taxes disguised as fees. As pertinent to
this case, Proposition 26‟s findings and declaration of purpose state: “Since the
enactment of Proposition 218 in 1996, the Constitution of the State of California has
required that increases in local taxes be approved by the voters. [¶] (c) Despite these
limitations, California taxes have continued to escalate. . . . [¶] . . . [¶] (e) This
escalation in taxation does not account for the recent phenomenon whereby the
Legislature and local governments have disguised new taxes as „fees‟ in order to exact
even more revenue from California taxpayers without having to abide by these
constitutional voting requirements. Fees couched as „regulatory‟ but which exceed the
reasonable costs of actual regulation or are simply imposed to raise revenue for a new
program and are not part of any licensing or permitting program are actually taxes and
should be subject to the limitations applicable to the imposition of taxes. [¶] (f) In order
to ensure the effectiveness of these constitutional limitations, this measure . . . defines a
„tax‟ for state and local purposes so that neither the Legislature nor local governments
can circumvent these restrictions on increasing taxes by simply defining new or expanded
taxes as „fees.‟ ” (Prop. 26, § 1, subds. (b), (c), (e), (f), reprinted at Historical Notes, 2B
West's Ann. Cal. Codes (2013) foll. art. 13A, § 3, pp. 296-297; see also Roseville, supra,
97 Cal.App.4th at p. 645, fn. 17 [noting courts may use ballot summary, arguments, and
analysis to construe voter-approved initiatives].)

10
 In short, the question of whether Redding‟s PILOT constitutes a tax under
Proposition 26 turns on whether the PILOT serves to raise general revenue or reflects the
reasonable costs to the city to provide electric service.
More specifically, for purposes of this case, whether the PILOT constitutes a tax
within the meaning of section 1, subdivision (e), of article XIII C turns on whether the
exception in article XIII C, section 1, subdivision (e)(2), applies. This exception asserted
by Redding pertains to “[a] charge imposed for a specific government service or product
provided directly to the payor that is not provided to those not charged, and which does
not exceed the reasonable costs to the local government of providing the service or
product.” The adoption of Proposition 26 shifted the burden of proof regarding the
exception‟s applicability to the local government. (Art. XIII C, § 1, [last para.]) The last
paragraph of article XIII C, section 1, provides: “The local government bears the burden
of proving by a preponderance of the evidence that a levy, charge, or other exaction is not
a tax, that the amount is no more than necessary to cover the reasonable costs of the
governmental activity, and that the manner in which those costs are allocated to a payor
bear a fair or reasonable relationship to the payor‟s burdens on, or benefits received from,
the governmental activity.”
C.
Redding’s PILOT
Because the Utility is municipally owned, Redding imposes the PILOT to collect
the same amount as would be due under the ad valorem tax on privately owned utilities.
Throughout its history, the PILOT has been measured against the ad valorem tax. The
PILOT has been adjusted to keep it equivalent to the ad valorem tax. It has not been
designed to approximate the reasonable costs of providing electric service in Redding.
The PILOT is calculated as a flat percentage of the Utility‟s assets. As a flat
percentage, the PILOT in this case resembles the in-lieu payment reviewed by this court

11
in Howard Jarvis Taxpayers Assn v. City of Roseville (2002) 97 Cal.App.4th 637
(Roseville). In Roseville, we considered a challenge to an in-lieu payment at a flat
four percent of the annual budgets of three of Roseville‟s municipal utilities that provided
water, sewer, and garbage collection. (Id. at p. 648.) In considering the constitutional
validity of the in-lieu payment, we acknowledged that “[o]f course,” the city could
recoup “what it costs to provide such services includ[ing] all the required costs of
providing service, short-term and long-term, including operation, maintenance, financial,
and capital expenditures.” (Id. at pp. 647-648.) Even so, we concluded the “fee does not
represent costs. It is a flat fee. It is imposed on the utilities‟ budgets, presumably after
their total costs have been accounted for in the budget process. If the budget of a utility
increases because of a cost increase unrelated to the in-lieu fee, the in-lieu revenues, as a
flat percentage of that increased budget, increase as well. The in-lieu fee is the same
percentage applied to each budget, regardless of varying uses of streets, alleys and rights-
of-way by the individual utilities. It cannot be said that this flat fee on budgets coincides
with these costs.” (Id. at p. 648.) Like the in-lieu payment at issue in Roseville,
Redding‟s PILOT is a flat percentage of the Utility‟s assets.
The revenues generated by the PILOT are transferred to Redding‟s general fund.
In Roseville, the in-lieu payment violated Proposition 218 because the “ „[r]evenue from
the in[-]lieu franchise fee is „placed in [Roseville‟s] general fund to pay for general
governmental services. It has not been pledged, formally or informally[,] for any specific
purpose.‟ ” (Id. at p. 650.) This practice ran “afoul of section 6(b)(2) that „[r]evenues
derived from the fee or charge shall not be used for any purpose other than that for which
the fee or charge was imposed.‟ It also contravene[d] section 6(b)(5) that „[n]o fee or
charge may be imposed for general governmental services. . . .‟ ” (Roseville, at p. 650.)
Here, as in Roseville, the transfer of the in-lieu payment into the general fund provides

12
additional support for the conclusion that the payment constitutes a revenue-generating
tax.
Redding argues Proposition 26 does not apply because the Utility‟s rates
(including the PILOT component) are not “imposed.” Redding reasons that “[e]ven if the
PILOT were funded by [electric] rates, no force or authority is involved here -- those who
wish to buy energy from [the Utility] pay the PILOT (and other costs argued to be funded
by [the Utility‟s] service rates) only to the extent they use its service. Those who obtain
energy in other ways do not. [There are] other alternatives to electric utility service (such
as solar, water, wind and geothermal power) . . . .” The trial court rejected the argument,
pointing out that while “legally [the Utility] has no monopoly as an electric utility, the
reality is that for many people there are no economically viable alternatives. The Court
used the example of a tenant who is renting a house or apartment that is served by [the
Utility]. While theoretically possible that a tenant who does not wish to use [the Utility]
could install an alternate power source, that is simply not a realistic option.” We agree.
A tax does not lose its revenue-generating character because there is a theoretical but
unrealistic way to escape from the tax‟s purview. The PILOT was imposed under
Redding‟s authority to generate revenue for its general fund.
We also reject Redding‟s argument that the PILOT was never “imposed” by “force
or authority” because the one percent levy was collected in customer bills for electric
service. For guidance, we turn to the instructive case of Howard Jarvis Taxpayers Assn
v. City of La Habra (2001) 25 Cal.4th 809, 823 (La Habra). In La Habra, the California
Supreme Court considered the question of when a tax on utility rates is “imposed.” (Id.
at p. 818.) The city argued the tax was not imposed until the voters approved the levy.
(Id. at pp. 817-818.) The Supreme Court rejected the proposition that “when a city
disregards the approval requirement in imposing a tax, the imposition has never happened
and thus may not be challenged.” (Id. at p. 818.) The La Habra court held Proposition

13
62, which added voter-approval requirements for local taxes, “prohibited the imposition
of a general tax „unless and until such general tax is submitted to the electorate.‟ (Gov.
Code, § 53723.) That command is allegedly violated each time the City collects its utility
tax through the service providers.” (La Habra, at p. 823, italics added.) The same
reasoning applies here. That the PILOT in this case may be collected through electric
service bills does not by itself render Proposition 26 inapplicable.
Redding next argues the PILOT “is a pre-existing legal obligation of [the Utility]
and could therefore be funded from rates.”5 In support, Redding notes the Utility‟s “non-
retail revenue is more than three times the amount of the PILOT.” This argument seemed
to be persuasive to the trial court, which concluded the Utility “has non-rate revenues that
exceed the amount of the PILOT, therefore, there is no evidence that the PILOT is paid
out of customer‟s rates.” We reject this reasoning. That the Utility has other sources of
income is not dispositive. The gravamen of the problem is that, regardless of what else
Redding might collect from certain customers, it has imposed a PILOT -- which it may
do only with voter approval or if able to show it reflects Redding‟s reasonable costs of
providing electric service.
The PILOT is also not saved from being a disguised tax simply because it is not
separately listed on the Utility customers‟ electric bills. A municipal payment in lieu of
taxes was held to violate Proposition 218 even though the in-lieu payment was not
separately listed in the utility bills challenged in Howard Jarvis Taxpayers Assn v. City of
Fresno (2005) 127 Cal.App.4th 914. Fresno involved a taxpayer lawsuit that focused on
the rates charged by the city‟s municipal utilities. (Id. at p. 917.) By ordinance, the City
of Fresno “required each municipal utility to „pay to the City, in lieu of property and

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5 We address the issue of whether the PILOT precedes the adoption of
Proposition 26 in part II, post.

14
other taxes normally placed upon private business,‟ an amount designated by the council
in a master fee resolution. (Fresno Mun. Code, § 4–803.) The fee [was] 1 percent of the
assessed value of fixed assets of the utility department or division.” (Id. at p. 917.) “The
overall amount of the in lieu fee [was] „blended‟ into the user fees (in a manner not
disclosed by the record), so that, for example, a water bill contain[ed] only a single
amount due for service; the pass-through of the in lieu fee [was] not separately reflected
on the bill. According to the budget of Fresno for the fiscal year 2003–2004 . . . in lieu
fees var[ied] as a percentage of the utility divisions‟ operating budgets, ranging up to
9 percent of the water division‟s budget and 11 percent of the wastewater division‟s
budget.” (Id. at p. 918.) The Fresno court noted even after Proposition 218, “[c]ities are
still entitled to recover all of their costs for utility services through user fees.” (Id. at
p. 922.) “The manner in which they may do so, however, is restricted by another portion
of Proposition 218: „The amount of a fee or charge imposed . . . shall not exceed the
proportional cost of the service attributable to the parcel.‟ (Art. XIII D, § 6, subd.
(b)(3).)” (Fresno, at pp. 922-923.) Thus, the Fresno court held the city needed to
“reasonably determine” the “unbudgeted costs of utilities enterprises and that those costs
be recovered through rates proportional to the cost of providing service to each parcel” if
it chose to charge the in-lieu payment. (Id. at p. 923.) In so holding, the Fresno court
recognized: “Undoubtedly this is a more complex process than the assessment of the in
lieu fee and the blending of that fee into the rate structure. Nevertheless, such a process
is now required by the California Constitution.” (Id. at p. 923.)
Despite Redding‟s insistence it could cover the PILOT costs with non-retail
income, the city protests the PILOT is necessary to comply with such costs to the Utility
as green power mandates (Pub. Util. Code, § 2854), other renewable energy mandates (id.
at §§ 399.11, 739.2 & 739.4), and Redding‟s “pre-Proposition 26 policy requiring
discounted power for low-income and senior households.” Nothing in Proposition 26

15
prevents the Utility from recouping its expenses. To the contrary, Proposition 26
expressly excepted from the definition of taxes any charge that “does not exceed the
reasonable costs to the local government of conferring the benefit or granting the
privilege.” (Art. XIII C, § 1, subd. (e)(1).) Neither Redding nor its Utility is restrained
from recovering the reasonable costs of electricity production and distribution.
Nor is the Utility required to charge a flat rate to all customers to prevent
discounted power to low-income and senior households. Variable rate plans, such as for
municipal delivery of water, have been upheld against challenge under Proposition 13.
(Brydon v. East Bay Mun. Utility Dist. (1994) 24 Cal.App.4th 178.) In Brydon, a
municipal water district imposed a variable rate structure for which the price increased
with consumption. This price “structure of the District [was] a response to state
mandated water resource conservation requirements.” (Id. at p. 192.) Even though a rate
varied among customers, the Brydon court rejected a challenge to the increased payment
for greater consumption as a tax for which voter approval was necessary. Brydon holds
the voter approval requirement “does not apply to every regulatory fee simply because, as
applied to one or another of the payor class, the fee is disproportionate to the service
rendered.” (Id. at p. 194.) Thus, the fact that customers of the Utility in this case might
pay more because of renewable energy mandates, or some rates might subsidize low-
income households, does not violate Proposition 26. However, Proposition 26 prohibits
the PILOT from increasing the bill of customers by the same amount as the ad valorem
tax on private utilities without voter approval or showing it reflects reasonable costs to
the city.
Accordingly, we conclude the PILOT constitutes a tax under Proposition 26 unless
Redding proves the amount collected is necessary to cover the reasonable costs to the city
to provide electric service. (Art. XIII C, § 1, subd. (e).) We consider whether any
portion of the “reasonable costs” exception provided by article XIII C, section 1,

16
subdivision (e)(2), exempts the PILOT from the voter approval requirement for taxes in
part III, post.
II
Whether Redding’s PILOT is “Grandfathered-in”
We turn to the question of whether the PILOT preexisted the adoption of
Proposition 26. Proposition 26 has no retrospective effect as to local taxes that existed
prior to November 3, 2010. (Brooktrails, supra, 218 Cal.App.4th at pp. 205-207.)
However, the parties disagree on whether the PILOT in this case existed prior to the
adoption of Proposition 26. Redding contends the PILOT is a set fixture of the Redding
budget that is grandfathered-in, i.e., escapes the applicability of Proposition 26 as a
preexisting levy. Plaintiffs respond the PILOT is a component of the electric rates that is
transferred to the general fund in Redding‟s biennial budget and is subject to recurring
discretionary adoption and adjustment. As we explain, the PILOT may be a familiar part
of the Redding biennial budget, but it has not been fixed by ordinance or any other
authority. Being subject to the Redding City Council‟s recurring discretion, it is not
grandfathered-in under Proposition 26.
A.
The Trial Court’s Retroactivity Finding
There is no dispute the PILOT has not been implemented by ordinance or other
law. Indeed, Redding explains that “City staff calculates the PILOT with each budget
according to the formula adopted by the City Council. [Citations.] Because the formula
relies on estimates, the PILOT is „trued up‟ with the adoption of the budgets in odd-
numbered years to correct estimates for the previous biennium.”
Moreover, the formula itself is periodically adjusted. The trial court found the
PILOT‟s formula has been “refined in 1992, 2002, and 2005.” The most notable
“refine[ment]” to the PILOT was made in the 2001-2003 budget to “bring it in line with

17
the State Board of Equalization property tax calculation methodologies.” However, it
appears undisputed that the PILOT has been adjusted to equate as nearly as practicable to
the tax a private utility would have to pay Redding in ad valorem taxes.
Despite the period adjustments in the Redding budgeting process, the trial court
dismissed plaintiffs‟ challenges on the rationale that the PILOT had been grandfathered-
in. The trial court reasoned that “Proposition 26 was not intended to require an election
every time a local government adopts a budget that includes pre-existing components so
long as that budget does not impose new or increased fees or charges or change the
manner in which those fees are calculated. The adoption of Resolution 2011-111
adopting the City of Redding‟s budget, that included the budget of REU and the PILOT
does not impose, extend, or increase a tax, and Proposition 26 does not apply.” (Fn.
omitted.)
B.
Adoption of PILOT in the Budgetary Cycle
Each budget is a discretionary legislative act made by each city council. (See
Scott v. Common Council (1996) 44 Cal.App.4th 684, 690-694; County of Butte v.
Superior Court (1985) 176 Cal.App.3d 693, 698.) The broad legislative discretion with
which a city council is imbued stands in contrast to a tax or fee fixed by ordinance. In
this case, each PILOT transfer represented a readoption in the discretion of each city
council. Indeed, the record shows changes to the method of calculating the PILOT were
made in 1992, 2002, and 2005. Consequently, the PILOT cannot be deemed to be
grandfathered-in as preceding the 2010 adoption of Proposition 26. (Cf. Barratt
American Inc. v. City of Rancho Cucamonga (2005) 37 Cal.4th 685 [discussing the
“reenactment rule” in a different statutory context]; Arcadia Development Co. v. City of
Morgan Hill (2008) 169 Cal.App.4th 253, 262-266; see also La Habra, supra, 25 Cal.4th
at p. 825 [“Cities and counties must eventually obey the state laws governing their taxing

18
authority and cannot continue indefinitely to collect unauthorized taxes”]; Advance
Medical Diagnostic Laboratories v. County of Los Angeles (1976) 58 Cal.App.3d 263,
269 [longtime government custom “even if conducted in the best of faith will not make
legal what is illegal”].)
The PILOT‟s regular appearance in Redding‟s budgetary process does not mean it
was a permanent or continuing transfer compelled by ordinance or other non-
discretionary authority. As a recurring discretionary part of the Redding biennial budget,
the PILOT cannot be said to precede or be grandfathered-in under Proposition 26. And,
the PILOT also cannot be said to be the product of legislation for which Proposition 218
provided a savings clause to allow “fees and charges” to be brought into compliance by a
certain date. Although Propositions 26 and 218 stand in pari materia -- namely they
relate to the same subject (People v. Honig (1996) 48 Cal.App.4th 289, 327) -- nothing in
either statute grandfathers in the PILOT simply because it has been a customary
recurrence in the Redding municipal budget.
As to the two-year budget adopted by Redding on June 11, 2009, we conclude the
included PILOT was grandfathered-in because budget adoption preceded the voters‟
approval of Proposition 26.6 Even though the PILOT in the 2009-approved Redding
budget did not expire until 2011, the PILOT for this budget was not subject to
Proposition 26. To the extent Redding continued to collect the PILOT as authorized in
2009, Redding does not need to cost justify the PILOT. Nonetheless, the December 7,
2010 increase of the PILOT by Redding does require cost justification under Proposition
26. Rather than being the continuation of a grandfathered-in rate, the December 2010

_____________________________________________________________________
6 Proposition 26 took effect on November 3, 2010, the day after being approved by
the voters. (Brooktrails, supra, 218 Cal.App.4th at p. 205; 2B West‟s Ann. Cal. Codes
(2013), Credits foll. art. XIII C, § 1, at p. 363.)

19
increase of the PILOT constitutes a tax under Proposition 26 unless Redding proves the
amount collected represents its reasonable costs to provide electric service. Thus,
Redding must cost justify the PILOT collected under the 2009 two-year Redding budget
to the extent that additional funds were collected based on the December 7, 2010 rate
increase.
The PILOT included in the two-year budget adopted by Redding on June 22,
2011, was not grandfathered-in because it was adopted after Proposition 26 became
effective in 2010.
III
Is Redding’s Pilot a Reasonable Cost?
Proposition 26 gives the local government the opportunity to prove the levy,
charge, or exaction amounts to “no more than necessary to cover the reasonable costs of
the governmental activity, and that the manner in which those costs are allocated to a
payor bear a fair or reasonable relationship to the payor‟s burdens on, or benefits received
from, the governmental activity.” (Art. XIII C, § 1 [last para.].) Consequently, we turn
to the issue of whether the PILOT reflects Redding‟s reasonable costs of providing
electrical service.
A.
Trial Court Decision
Although Redding is entitled to prove the PILOT reflects only reasonable costs of
electric service (Art. XIII C, § 1, subd. (e)), the question arises whether that factual issue
has been resolved in this case. We requested supplemental briefing to clarify a portion of
the trial court‟s decision that seemingly makes the finding the PILOT reflected a
reasonable cost of providing electric service.
The pertinent portion of the trial court decision falls under the heading,
“Additional Issues” for which the court explained: “While not essential to the analysis

20
and the above conclusion [that grandfathering exempted the PILOT from Proposition
26‟s purview], the Court finds that the following comments warrant inclusion in a
discussion of the issues that came before the Court.” Among these, the trial court
included a discussion of whether the PILOT reflected the reasonable costs to Redding for
providing electric service. The trial court stated:
“Even if the PILOT were part of the utility rates charged to ratepayers, it could
reasonably be argued that the PILOT is part of the costs of providing the service. All
business enterprises have costs and expenses that are a cost of doing business or a cost of
providing the service or product. All businesses are required to pay taxes. Here, the City
had the foresight to own and operate its own electric utility. As a result, [Redding] has
utility rates that are comparatively lower than many others in the state. If there was a
private company providing electric service, that company would be required to pay taxes
to [Redding] for the services and benefits [Redding] provides. That expense could be
passed on to customers as a cost of providing the service and product, and would not be
subject to voter approval. The private utility could charge whatever rates it desired.
Requiring [Redding] to put its electric rates out to vote every time a rate increase is
necessary (because the rates include items that arguably are not „directly related‟ to the
cost of providing electricity) cannot reasonably be deemed to be an intended consequence
of Proposition 26.”
B.
Reasonable Cost to Redding?
Undoubtedly, Redding incurs costs to provide infrastructure and support to the
Utility. 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 sparks a fire, or a downed tree cuts a live utility line, endangering Redding‟s

21
citizens. The trial court‟s exploration of the issue of reasonable costs constitutes a
conclusion of law rather than a finding of fact. Rather than finding the costs incurred by
Redding to provide electric service, the trial court determined the Utility‟s comparatively
low rates necessarily mean the PILOT passes constitutional muster under Proposition 26.
We reject this legal conclusion.
We also reject the assertion made by Redding at oral argument that a 1999 letter
supplies the facts necessary to determine whether the PILOT reflects the reasonable costs
to Redding for providing electric service. The letter was sent by an independent
consultant to the director of the Utility to recommend that the PILOT calculation
methodology not be changed to lower the amount transferred to Redding‟s general fund.
The consultant‟s conclusion largely rested on a survey of rates charged by other
municipal utilities rather than any examination of costs incurred by Redding in providing
electric service. Indeed, Redding conceded that no cost of service analysis has been
conducted to determine the reasonable cost of providing electric service.
We disagree with Redding‟s assertion, in its supplemental brief, that the PILOT
comports with Proposition 26 because Redding‟s electric rates are lower than those paid
by others in California. Even if Redding‟s rates were the lowest in California,
Proposition 26 would nonetheless require the PILOT to either reflect the city‟s reasonable
cost of providing electric service or be approved by two-thirds of voters. An
unconstitutional tax is not rendered lawful simply by being bundled with otherwise
reasonable utility rates.
We decline Redding‟s invitation to engage in a fact-finding mission to determine
whether the administrative record contains enough evidence to cost justify the PILOT for
purposes of Proposition 26. As we have explained, the trial court‟s conclusion that the
PILOT passes constitutional muster because the PILOT is equivalent to the ad valorem
tax rate applicable to private utilities constitutes a conclusion of law. The possibility that

22
non-rate revenues exceed the PILOT does not satisfy Proposition 26‟s requirement that
Redding demonstrate the collected tax reflects the reasonable costs of providing electric
service. So too, Redding‟s argument that the Utility‟s electricity rates are “reasonable”
does not prove the PILOT bears a reasonable relationship to the costs of service.
Redding misses the mark when it asserts the administrative record shows that “the
December 2010 rates do not exceed the cost of providing electric service to [Utility‟s]
customers.” In support, Redding asserts the fairness of the rate-making process and the
participation of appellants‟ counsel in the rate-making process. The fairness of the rate-
making process, however, does not address whether the amount of the PILOT reasonably
reflected Redding‟s service costs. Tellingly, Redding cites to public comments in the rate
making process rather than any cost study by Redding that shows the dollar amounts
expended to provide electricity generation or distribution.
Because findings of fact are the unique province of the trial court, we are unable to
supply the factual findings necessary to uphold the PILOT as a reasonable cost under
Proposition 26. Our conclusion “reflects an „essential distinction between the trial and
the appellate court . . . that it is the province of the trial court to decide questions of fact
and of the appellate court to decide questions of law. . . .‟ ” (In re Zeth S. (2003) 31
Cal.4th 396, 405, quoting Tupman v. Haberkern (1929) 208 Cal. 256, 262–263.)
Perhaps the PILOT reflects Redding‟s reasonable cost to provide electric service.
However, this factual question has not yet been properly determined by the trial court.
The question of whether a particular levy, charge, or exaction reflects a “reasonable cost”
to the local government requires a factual rather than legal answer. (Mills v. County of
Trinity (1980) 108 Cal.App.3d 656, 663 (Mills).)
In Mills, this court considered whether the two-thirds voter approval requirement
applied to fees for county services in processing subdivision, zoning, and other land-use
applications. (108 Cal.App.3d at pp. 658-659.) Mills held that “the „special tax‟ referred

23
to in section 4 of article XIII A does not embrace fees charged in connection with
regulatory activities which fees do not exceed the reasonable cost of providing services
necessary to the activity for which the fee is charged and which are not levied for
unrelated revenue purposes.” (Id. at p. 659.) We explained that “[s]ince the trial court
held the fees imposed by [the county‟s charges] constitute a „special tax‟ as a matter of
law, the factual question whether or not such fees exceed the reasonable cost of the
related regulatory activity has never been litigated. On remand that issue must be tried.”
(Id. at p. 663.) Accordingly, the disposition in Mills was to “reverse and remand for a
factual determination of whether the fees in question are reasonably compensatory for the
costs occasioned by the regulated activities.” (Id. at p. 660.)
In Sinclair Paint, supra, 15 Cal.4th 866, the California Supreme Court likewise
held reversal and remand was necessary “ „for a factual determination of whether the fees
in question are reasonably compensatory for the costs occasioned by the regulated
activities.‟ ” (California Assn. of Professional Scientists v. Department of Fish & Game
(2000) 79 Cal.App.4th 935, 947.) In Sinclair Paint, the Supreme Court concluded that
“Sinclair should be permitted to attempt to prove at trial that the amount of fees assessed
and paid exceeded the reasonable cost of providing the protective services for which the
fees were charged, or that the fees were levied for unrelated revenue purposes.
[Citation.] Additionally, Sinclair will have the opportunity to try to show that no clear
nexus exists between its products and childhood lead poisoning, or that the amount of the
fees bore no reasonable relationship to the social or economic „burdens‟ its operations
generated.” (Sinclair Paint, supra, 15 Cal.4th at p. 881.)
Following Mills and Sinclair Paint, we determine remand is necessary to allow the
trial court to determine the factual question of whether the PILOT reflects the reasonable

24
costs borne by Redding to provide electric service.7 (See California Farm Bureau
Federation v. State Water Resources Control Bd. (2011) 51 Cal.4th 421, 446 [remand for
findings].)
DISPOSITION
The judgment is reversed and the cause remanded for further proceedings
consistent with this opinion. Plaintiffs (Citizens for Fair REU Rates, Michael Schmitz,
Shirlyn Pappas, and Fee Fighter LLC) shall recover their costs on appeal. (Cal. Rules of
Court, rule 8.278(a)(1) & (2).)

HOCH , J.

I concur:

MAURO , Acting P. J.

_____________________________________________________________________
7 Given our conclusion, it would be premature to consider the question of remedy
for improperly collected taxes in violation of Proposition 26. (See Gov. Code, § 53728.)

25
 DUARTE, J., Dissenting
The majority opinion requires every municipal utility that is charged a payment in
lieu of taxes (PILOT), with the insignificant exception of those utilities, if any, that pay
PILOTS pursuant to a pre-Proposition 26 ordinance, to prove at a trial the exact cost of
providing fire, police, sanitation, streets, and other municipal services, no doubt with
competing accounting, municipal finance, and other experts. This result is disruptive,
uncertain, and chaotic, and, in my view, is not compelled by Proposition 26 (as approved
by voters, Gen. Elec., Nov. 2, 2010).
The resulting disruption will be widespread; I note that amici curiae in support of
Redding include the League of California Cities, the California State Association of
Counties, and the California Municipal Utilities Association (CMUA).1
I perceive this result as unwarranted because, in my view, a PILOT such as
Redding‟s--which actually conforms to the limitations set forth by Proposition 13 (as
approved by voters, Primary Elect., June 6, 1987) and implementing laws that are
designed to establish “fair” property tax rates--as a matter of law does not “exceed the
reasonable costs to the local government of providing the service.” (Cal. Const., art. XIII
C, § 1, subd. (e)(2).) Therefore, it is not a “tax” as defined by Proposition 26.
Accordingly, I respectfully dissent.

_____________________________________________________________________
1 CMUA electric utility members potentially impacted by the majority decision include
the Cities of Alameda, Anaheim, Azusa, Banning, Burbank, Cerritos, Colton, Corona,
Glendale, Gridley, Healdsburg, Hercules, Lodi, Lompoc, Los Angeles, Moreno Valley,
Needles, Palo Alto, Pasadena, Pittsburg, Rancho Cucamonga, Redding, Riverside,
Roseville, Santa Clara, Shasta Lake, Ukiah, and Vernon; also represented are the
Imperial, Merced, Modesto, and Turlock Irrigation Districts; the Northern California
Power Agency; Southern California Public Power Authority; Transmission Agency of
Northern California; Lassen Municipal Utility District; Power and Water Resources
Pooling Authority; Sacramento Municipal Utility District; the Trinity and Donner Public
Utility Districts; the Metropolitan Water District of Southern California; and the City and
County of San Francisco, Hetch Hetchy.

1
 I agree with the majority that Redding‟s PILOT program is not grandfathered-in,
and thus immune from a Proposition 26 challenge, because the PILOT is adopted by each
successive city council during the biennial budget process. As the majority explains, this
practice, however longstanding, is unlike an ordinance, and each council must consider
the potential applicability of Proposition 26 when using the PILOT as one component
during the process of setting electricity rates.2 I also agree with the majority‟s rejection
of Redding‟s claims that it does not “impose” the PILOT because some customers may
be able to generate their own electricity.
I agree that the record does not contain evidence of the exact benefits conferred by
Redding to its utility--benefits available equally to all other property owners who pay
their taxes in conformity with Proposition 13 and related laws. My disagreement flows
from the fact that a PILOT, by definition, is designed to equate to the property taxes the
utility would pay, were it not a municipal utility. The PILOT is a “payment in lieu of
taxes.” (Italics added.) In this case, the trial court found Redding‟s PILOT budget
transfer equated to what a private utility would pay in taxes. Indeed, plaintiffs
themselves pleaded that Redding‟s PILOT equals “as closely as possible” the taxes a
private utility would pay. Thus, Redding‟s PILOT equals what a private utility would
pay in taxes.3
As I shall now explain, in my view, any PILOT, whenever adopted, is reasonable
as a matter of law if it actually comports with Proposition 13 and implementing laws.

_____________________________________________________________________
2 Although this conclusion is compelled by existing precedent, it seems clear Proposition
26 was not intended to apply to pre-existing municipal charges.
3 Parts of plaintiffs‟ briefs appear to contest this, and they contested it at oral argument.
However, the point is forfeited both because it contradicts their theory of the case (see
Panopulos v. Maderis (1956) 47 Cal.2d 337, 340-341), and because they fail to set forth
the facts in light of the proper standard of review (see Foreman & Clark Corp. v. Fallon
(1971) 3 Cal.3d 875, 881).

2
 The trial court stated that because the PILOT equated to what a private utility
would pay in taxes, its use in the periodic calculation of electric rates by Redding does
not result in an unreasonable charge for providing electric service. In full, this part of the
trial court‟s ruling reads as follows:

“There are many components of [a] rate payer‟s bill that are technically not
directly related to the cost of providing electrical service. These include costs
built in to cover programs mandated by law. It is not a reasonable interpretation of
Prop 26 that voters intended that any time electric rates are set, this requires an
election and voter approval of those portions of the electric rates.

“Even if the PILOT were part of the utility rates charged to ratepayers, it
could reasonably be argued that the PILOT is part of the cost of providing the
service. All business enterprises have costs and expenses that are a cost of doing
business, including regulatory fees, taxes, and all other items that constitute
overhead. These are passed on to customers through pricing and rates and are a
cost of doing business or a cost of providing the service or product. All businesses
are required to pay taxes. Here, the City of Redding had the foresight to own and
operate its own electric utility. As a result . . . [i]t has utility rates that are
comparatively lower than many others in the state. If there was a private company
providing electric service, that company would be required to pay taxes to
[Redding] for the services and benefits [Redding] provides. That expense would
be passed on to customers as a cost of providing the service and product, and
would not be subject to voter approval. The private utility could charge whatever
rates it desired. Requiring [Redding] to put its electric rates out to vote every time
a rate increase is necessary (because the rates include items that arguably are not
„directly related‟ to the cost of providing electricity) cannot reasonably be deemed
to be an intended consequence of Proposition 26.”
I make two preliminary observations about this ruling.
First, a private utility servicing Redding could not “charge whatever rates it
desired” as the trial court suggested. The Public Utilities Commission (PUC) has broad
regulatory authority, conferred by the California Constitution and relevant statutes. (See
Southern California Edison Co. v. Peevey (2003) 31 Cal.4th 781, 792 (Peevey); 8 Witkin,
Summary of Cal. Law (10th ed. 2005) Constitutional Law, §§ 1099-1100, pp. 726-729.)
“Statutorily, [the] PUC is authorized to supervise and regulate public utilities and to „do
all things . . . which are necessary and convenient in the exercise of such power and

3
jurisdiction‟ ([Pub. Util. Code,] § 701); this includes the authority to determine and fix
„just, reasonable [and] sufficient rates‟ ([id.,] § 728) to be charged by the utilities.”
(Peevey, supra, 31 Cal.4th at p. 792.) “In contrast, publicly owned municipal utilities are
not regulated by the [PUC] or any other supervising agency [citations] in the absence of a
legislative grant of authority . . . . Thus, it is the public entity itself which fixes utility
rates pursuant to its independent legislative power.” (American Microsystems, Inc. v.
City of Santa Clara (1982) 137 Cal.App.3d 1037, 1042-1043 (American Microsystems).)
Importantly, however, the PUC considers tax liability when determining whether a
private utility‟s proposed rates are just and reasonable. (See Southern California Gas Co.
v. Public Utilities Com. (1979) 23 Cal.3d 470, 474 [“As taxes are part of a utility‟s cost
of service, this expense is borne by the ratepayers”]; City and County of San Francisco v.
Public Utilities Com. (1971) 6 Cal.3d 119, 122-131; SFPP, L.P. v. Public Utilities Com.
(2013) 217 Cal.App.4th 784, 795-800.) Thus, although the trial court overstated the
power of a private utility to set rates, that fact does not diminish the force of the trial
court‟s point: A private utility would properly claim necessary taxes--including local
property taxes assessed within the limits of Proposition 13 and implementing laws--as
valid costs of service in its PUC rate-setting applications.
Second, although the trial court used the phrase “it could reasonably be argued”
that Redding‟s PILOT was a valid cost of service, in context the trial court was not
merely hypothesizing about reasonableness, it was finding reasonableness. Just prior to
the quoted passage, the trial court stated that if the PILOT were the imposition, extension
or increase of a tax, “the next issue to be decided” is whether the charges exceeded “the
reasonable costs of providing” service. Then the trial court addressed the issue in detail,
as fully quoted ante. Thus, I interpret this passage as an alternative or secondary finding
by the trial court, not mere musings.
In my view, the trial court‟s finding is not a factual finding based on the evidence,
but a legally-compelled finding. Under Proposition 26 a “tax” does not include: “A

4
charge imposed for a specific government service . . . provided directly to the payor that
is not provided to those not charged, and which does not exceed the reasonable costs to
the local government of providing the service . . . .” (Cal. Const., art. XIII C, § 1, subd.
(e)(2).) Further, the local government must show “the amount is no more than necessary
to cover the reasonable costs” and that “the manner in which those costs are allocated to a
payor bear a fair or reasonable relationship” to the benefits received. (Id., § 1, last par.,
italics added.) Thus Proposition 26 does not compel Redding to charge the utility the
least possible amount for municipal services, nor to charge customers the least possible
amount for electricity, as plaintiffs assert.
The electric rates set by Redding may be increased by the PILOT transfer, but that
is only one factor the city council considers in setting rates. That is, an increase in the
amount of the PILOT (e.g., through acquisition of new property by the utility) does not
raise rates; rates are set by the city council. (See American Microsystems, supra, 137
Cal.App.3d at pp. 1042-1043.) Thus, the PILOT is not of itself a “levy, charge, or other
exaction” (Cal. Const., art. XIII C, § 1, subd. (e)) imposed on ratepayers.
The question here is whether Redding, exercising its legislative discretion, may
determine part of the reasonable costs of its utility to include an amount equal to what
Redding would collect in taxes from an equivalent private utility, and consider this
amount as “costs” when it considers the many factors that go into setting utility rates. I
would answer the question “yes” as a matter of law.
A municipal budget ascertains “the amount of money which must be raised to
conduct the affairs of the municipality for the ensuing fiscal year, so that the business of
the municipality may be conducted on a balanced budget, and on sound business
principles, and, as far as practicable, on the same basis that a successful private business
is conducted.” (15 McQuillin, Law of Municipal Corporations (3d ed. 2014) Budget
Law, § 39:49, fns. omitted.) We have deemed it to be a “fundamental proposition . . .
that the adoption of a budget is a legislative function.” (County of Butte v. Superior

5
Court (1985) 176 Cal.App.3d 693, 698 (Butte); see Scott v. Common Council (1996) 44
Cal.App.4th 684, 690-694.) “The budgetary process entails a complex balancing of
public needs in many and varied areas with the finite financial resources available for
distribution among those demands. It involves interdependent political, social and
economic judgments which cannot be left to individual officers acting in isolation; rather,
it is, and indeed must be, the responsibility of the legislative body to weigh those needs
and set priorities for the utilization of the limited revenues available.” (Butte, supra, 176
Cal.App.3d at p. 699; see Collier v. City and County of San Francisco (2007) 151
Cal.App.4th 1326, 1345 [citing this passage of Butte with approval].)
Taxation is fundamental to municipal budgeting. Proposition 13--the foundation
of future tax and appropriation initiatives, including Proposition 26--ensures “fair”
property taxation. (Ballot Pamp., Primary Elect. (June 6, 1978) argument in favor of
Prop. 13, p. 58; id., rebuttal to argument against Prop. 3, p. 59, capitalization omitted.)
Therefore, if the amount of a PILOT is consistent with Proposition 13 and implementing
legislation, the PILOT perforce is fair and reasonable. Proposition 26 was not designed
to allow the utility to use Redding‟s general civic services without paying its “fair share.”
By requiring the utility to pay the same amount that a private utility would pay in
taxes, Redding recoups the reasonable or--as stated by Proposition 13--“fair” costs
incurred in providing electric service. This insures Redding operates “on sound business
principles, and, as far as practicable, on the same basis that a successful private business
is conducted.” (15 McQuillin, supra, § 39:49; see also 12 McQuillin, supra, § 35:65 [“In
setting rates, a city may take into consideration the fact that the property of the utility is
not taxed and that other services furnished by the city, such as fire and police protection,
are furnished without charge”].)

6
Accordingly, I would affirm the judgment in favor of Redding.

DUARTE , J.

7