California Court of Appeal Rejects Voter Approval Requirement for Gas Pipeline Franchise Fee
All taxes must be approved by voters. Article XIII C of the California Constitution defines a “tax” as “any levy, charge, or exaction of any kind imposed by a local government” unless one of seven exemptions apply. Exemption 4 provides that a “tax” does not include “a charge imposed for entrance to or use of local government property.” Franchise fees fit within the broad definition of a “tax,” but it has remained an open question whether they fall within an exemption and to what extent they are subject to a reasonableness standard. Recently in Nguyen v. City of Los Angeles, the California Court of Appeal addressed these open questions in the context of a natural gas pipeline franchise.
The court in Nguyen ruled that a franchise fee paid by a natural gas utility, and passed in part onto customers in their rates, was not a tax. The franchise fee fit within Exemption 4 because it was paid “in exchange for the use of and access to specific City property beyond what would otherwise be available to the public” by authorizing the gas pipeline system to be installed under public streets. The court acknowledged the franchise also included rights to operate a business, but held those rights were indistinguishable from the use and access rights under the franchise, and the entire fee was not subject to voter approval. The court also declared that Exemption 4 does not include a requirement that the franchise fee be reasonable in relation to the overall value of the franchise. Lastly, the court concluded that the fee actually was reasonable because it was the result of bona fide negotiations and approved by the California Public Utilities Commission.
Looking forward, the Nguyen case may provide support for finding that solid waste franchise fees, even when passed on to customers, are exempt from the voter approval requirement.
If you have any questions regarding these franchise fee issues, please contact Chelsea O’Sullivan or Robin Harris.
