The City of Santa Barbara was a dealt a significant setback this week by a court of appeal decision that the 1 percent surcharge it added to Southern California Edison’s franchise agreement was in reality “an illegal tax masquerading as a franchise fee.” Under the terms of Prop 218, any such tax needed to be approved by the voters first.

The Santa Barbara City Council imposed the additional 1 percent fee on the electric company in 2005 — on top of the 1 percent it was already collecting — and has been using the additional $600,000 to $700,000 generated a year for general purposes.

In 2011, downtown hotel owner Rolland Jacks sued City Hall on behalf of all ratepayers, charging the surcharge was an illegal tax and demanded a refund. The judicial panel ruled that if the revenues generated by the surcharge were used to compensate City Hall for installing poles and power lines on city-owned rights of way, it would have constituted a “franchise fee” and would have been acceptable. But because the money was used “for general spending purposes,” the court deemed it a tax.

City Attorney Ariel Calonne took exception to this distinction, but said he’s still “cogitating” whether to seek review by the California Supreme Court. At issue is not only the money to be refunded, but the precedent it could set. Other California cities worry they could be hampered in their ability negotiate higher franchise fees from utility companies if the Santa Barbara ruling — the first of its kind in California — stands. The League of California Cities argued such fees now account for 5.8 percent of the general revenues accruing in state cities; to require voter approval would pose a significant hardship.

The Court of Appeal wrote dismissively of the “parade of horribles” invoked by the League and insisted in this case that “[Southern California Edison] is merely a conduit through which the tax revenues flow.” If the ruling stands, the next step would be for the trial court to determine the size of the class in the class action lawsuit and how many years back the surcharge needs to be refunded.


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