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Cities Creatively Include “Rents” And “Right Of Way Fees” As “Costs of Service” To Evade Liability Under Propositions 218 And 26

by | Jun 24, 2021 | Firm News |

Under California Constitution, article XIII D, local governments are prohibited from imposing fees and charges that exceed the cost of service.   Under article XIII C, a fee or charge for a service is a potential tax, unless the local government can show that the fee does not exceed its cost of service.   So the game many local governments play is to deceptively increase their costs by charging their own utilities for “rents,” or “franchise fees” or “right of way fees,” without tying such fees to any actual cost incurred by the local government to provide the service.  It allows local governments to generate substantial profits from excessive rates funded by local ratepayers.

Such charges for “rent” or “rights of way” often can amount to millions of dollars in profits for the local government.  They are often just mechanisms to conceal the fact that the local government is taxing its ratepayers through excessive municipal utility rates.  Local Governments typically argue that rents, franchise fees and similar “costs” are typical expenses incurred to operate a utility that are properly included in their cost of service or revenue requirement calculation.   The key is to overcoming such arguments is to show that such “rents” or “rights of way fees” do not actually reflect a cost paid by the local government, despite their labels.  If they are not tied to actual costs, they must be excluded from the local government’s costs of service determination.  If excluding such “charges” causes the local government’s property-related fees to exceed costs, the local government is likely violating article XIII D, section 6.  If the utility rates are taxes as defined by Proposition 26, the taxes likely must be approved by voters.