Grand Terrace In Suit Vs. Riverside Highland Water Co. Over Franchise

By Mark Gutglueck
Two primary elements of the establishment in the Grand Terrace community are at  loggerheads following City Hall’s resolution earlier this year to begin collecting from the Riverside Highland Water Company a franchise fee the utility has avoided paying since the city’s incorporation in 1978.
While the city maintains it has the right to impose such a fee by virtue of its accommodation of the company’s operations within its jurisdiction, and estimates it has forgone some half of a million in revenue by not collecting franchise fees in the past, the company maintains that as a legally constituted local utility for more than a century it is exempt from paying such fees. The company resisted the city’s imposition of the fee in question, prompting the city to file suit against the company. In response, the company maintains it has no other option than to raise rates to pass on the burden of defraying the cost of the fees to its customers, which it claimed in a mailer recently sent to the city’s residents is tantamount to a tax and therefore constitutes an illegitimate ploy by the city to raise taxes without a required vote of the city’s taxpayers.
The Riverside Highland Water Company was incorporated as a mutual water company by the State of California in 1898, and as such provided domestic and irrigation water to the entirety of what is now the City of Grand Terrace, portions of the City of Colton and unincorporated areas of the counties of San Bernardino and Riverside, including Highgrove, which immediately borders Grand Terrace at the San Bernardino/Riverside County Line. The company claims that it obtained and perfected property rights which gives the company authorization to transmit and distribute water to its shareholders over what is now public property in Grand Terrace. It obtained that right, the company maintains, through either express conveyance or by the application of law beginning 80 years prior to Grand Terrace incorporating as a city.
Thus, the Riverside Highland Water Company contends, it has an easement to allow its pipes and appurtenances to remain in place beneath roads, sidewalks and other public properties in Grand Terrace. An easement is the right of an entity or individual to use land owned by another entity or individual for a specific purpose, even though the easement holder does not have title to the land in question. Easements are most often created explicitly by language contained in binding documents, although an easement can be implied, that is, taken to exist without being officially entered into by the landowner and the easement user and without being officially recorded. Such unrecorded easements are referred to as “implied easements,” are complex, and are subject to interpretation and determination by the courts, based primarily on the intention of the original parties, as well as the past use of the property in question.
Precipitating the showdown between the City of Grand Terrace and the Riverside Highland Water Company was a decision made by the California Supreme Court in June in the case of Jacks v. the City of Santa Barbara. In that matter the City of Santa Barbara sought to impose a one percent surcharge on top of the one-percent franchise fee the city already imposed on Southern California Edison for the privilege to construct and use equipment along, over and under the city’s streets to distribute electricity. Southern California Edison agreed to the imposition of that additional levy only on the condition that it would be granted permission by the California Public Utilities Commission to impose on its customers an additional one percent surcharge. The California Public Utilities Commission allowed that surcharge on customers to be made. However, part of the arrangement contained a requirement that the City of Santa Barbara maintain half of the money it received from the surcharge in an account sequestered from its general fund and used expressly for an underground utilities fund. The city, however, diverted all of the surcharge money into its general fund, touching off a class action lawsuit brought under the name of Roland Jacks, a Southern California Edison customer. Jacks alleged that the surcharge was an illegal tax under Proposition 218, which requires voter approval of all local taxes. The plaintiffs sought refunds of the charges collected to that point and discontinuation of the surcharge going forward. The city prevailed at the trial court level, successfully arguing that a franchise fee is not a tax under Proposition 218. The Jacks plaintiffs appealed that decision to the California Court of Appeal Second Appellate District Division Six. The appellate court in 2015 reversed the trial court, ruling that the California Constitution, as amended by Proposition 218 prohibits local governments from imposing new or increased taxes without first obtaining voter consent, concluding that the one percent surcharge was an illegal tax masquerading as a franchise fee. The city appealed the appellate court’s ruling to the California Supreme Court. The Supreme Court undercut the plaintiffs, ruling that franchise fees are not proceeds from taxes, the amount of a franchise fee need not be based on costs, cities are free to sell or lease their property, the fact that a franchise fee is collected for the purpose of generating revenue does not establish that the compensation paid for the property interests is a tax, and the plaintiff did not establish the claim that the surcharge is a tax.
Grand Terrace city officials, based upon an earlier discovery that since its inception as a municipality in 1978 the city had not collected franchise fees, last year initiated a dialogue with Riverside Highland Water Company officers about the city’s collection of a one percent franchise fee. The city stepped up that effort this spring. In June, the California Supreme Court ruling in the Jacks case emboldened city officials further.
According to Grand Terrace City Councilwoman Sylvia Robles, for the entire length of its existence as a municipal entity, the City of Grand Terrace has been sustaining costs relating to the city’s accommodation of the water company infrastructure, including having to repair or alter streets and sidewalks in the aftermath of excavations to repair, replace or upgrade pipes.
She said the water company had reacted to the city’s prodding on the issue by asserting that it had been in place and delivering services to what became the city and the surrounding area for four-fifths of a century before the city incorporated, which gave the company immunity from any requirements that it defray the cost of damage to city assets as a consequence of utility operations.
“The company responded to us in writing,” Robles said. “In their correspondence they said the company predated the incorporation of the city and they had utility easements that granted them unobstructed access to their system. So, the city and our attorney asked for the production of documents to demonstrate that. They were not able to forward us any easements that the city had granted or ones that predated the city.”
Moreover, Robles said, the Riverside Highland Water Company claimed that the California Constitution allows utility companies to form in the absence of local government and thus without their permission and without being subject to their authority. Robles said that was true in the sense that “they [public officials] wanted the state to grow. But that didn’t mean that the state or local government couldn’t come back and assert their property rights. In Jacks vs. Santa Barbara, the California Supreme Court found that a franchise fee is not a tax. It’s a property right. We own the property, so we have a right to that fee.”
Robles said it is not accurate that the city intends to seek reimbursement on the fees it has not collected, but rather intends to impose a fee going forward.
“There has never been a discussion about recapturing past revenue,” she said.
Robles said that under the law the city is absolutely entitled to collect a franchise fee of “one to two percent of the water bill,” which she said would limit its application to the company’s charge for water use and would not be levied on the department’s meter charges or any other elements of the department’s bi-monthly bill.
After the city broached having the water company pay the franchise fee, Riverside Highland refused, Robles said.
“We asked for them to consider it [a franchise arrangement] in an informal way,” Robles said. “It was at the point that they refused to come to the table that we filed the lawsuit.”
Andrew Turner of the Pasadena-based law firm of Lagerlof, Senecal, Gosney & Kruse filed suit in San Bernardino County Superior Court on behalf of the City of Grand Terrace on July 10, 2017. According to that suit, “Defendant Riverside Highland Water Company is a California Corporation, with its principal offices in the City of Grand Terrace. A portion of the water company’s service area lies within the City of Grand Terrace. The water company supplies water for municipal, domestic, and irrigation uses to its customers within its service area, including the city. This involves the installation and maintenance of water mains and related appurtenances within rights of way under the dominion and control of the city. As a municipality, and under the authority provided in the Franchise Act of 1937 [Public Utilities Code §§ 9201, et seq.], the city has the right to require franchises of any utility provider seeking to use the city’s rights of way for transmission facilities, such as water mains. The city has demanded that the water company enter into negotiations for a franchise that would cover water company facilities in city rights of way. Rather than undertake the application and negotiation process to finalize the terms of a franchise, the water company has instead asserted that it has the right to maintain its facilities in city streets based upon the fact that its facilities predate the formation of the city. The water company also claims it has easement rights in the streets, but has failed to provide evidence of such rights. An actual controversy exists between the city and the water company as to their respective rights and duties under the Franchise Act of 1937. The city contends that the water company can be compelled to obtain a franchise from the city. The water company disputes the city’s contentions, claiming what is in effect a prior right to operate its facilities in the city streets.”
In its lawsuit, the city seeks “a declaration that the water company is obligated to obtain franchise from the city as a condition to operating its facilities in the city rights of way” along with reimbursement of the city’s costs in filing the lawsuit.
On November 28, the water company sent a letter to its customers, who are its de facto shareholders as landowners or residents within its corporate jurisdiction of operation. The letter referenced “recent efforts of the City of Grand Terrace to impose a new water tax on the residents of the city through the imposition of a franchise fee on the Riverside Highland Water Company by virtue of the lawsuit.” The letter references the incorporation of Riverside Highland “as a mutual water company by the State of California in 1898” and its delivery of water to the city. “As such, the property rights by which the company transmits and distributes water to its shareholders were acquired either by express conveyance or by operation of law approximately 80 years prior to the city’s incorporation in 1978. Nevertheless, the City of Grand Terrace has filed a lawsuit against Riverside Highland Water Company seeking legal authority to unilaterally impose a franchise fee on the company for the so-called privilege of the use of the company’s own pre-existing infrastructure. As a non-profit mutual water company, the company is required by California law to deliver water to its shareholders at cost. Therefore, Riverside Highland Water Company would be compelled to pass any franchise fee levied by the City of Grand Terrace and all associated administrative costs onto Grand Terrace customers.”
The letter continues, “Consequently, the City of Grand Terrace is – in a very real sense – suing its own residents for the authority to impose a new tax on your water bill. Further, since the city’s legal costs are being paid out of its public monies, and the company’s legal costs are being paid out of its corporate funds, the residents are paying twice to both initiate and defend a lawsuit that could result in a new water tax against the residents of Grand Terrace. This is a colossal waste of our financial resources and an unconscionable abuse of the public trust. Instead, the city and the company should operate in harmony to provide the essential public services that are each party’s respective responsibilities. It is Riverside Highland Water Company’s hope that the city council will reconsider its litigation and dismiss its lawsuit against the company. The company remains willing to pay inspection fees, street-cut fees, and permit fees to the city. However, it is both illegal and unnecessary for the City of Grand Terrace to attempt to extract additional new franchise fees from the company for the use of facilities that have been in place since as early as the 1800s – and in some cases at least 80 years prior to the city’s formation.”
In response to the Riverside Highland Water Company’s letter, Grand Terrace City Manager G. Harold Duffey sent out a letter on behalf of the city. Noting that as city manager “I am responsible to insure (sic) the city’s fiscal solvency,” Duffey stated, “A review of the city’s financial records showed that Riverside Highland Water Company was not in compliance with the city’s municipal code” through “37 years of unpaid street cuts, amounting to approximately $500,000. I immediately contacted Riverside Highland Water and they agreed to start paying their street cut fees in 2016. However, Riverside Highland Water continues to insist that they are exempt from paying a franchise fee because they were operating before the city incorporated. The city requested proof of the exemption but Riverside Highland Water has not provided the necessary documentation.”
Duffey said he was given direction by the city council to work with the Riverside Highland Water Company to have it pay its share of the cost of cutting into the city’s streets for pipeline repair, to press company officials to provide documentation and/or proof of the company’s claim of exemption from a franchise fee and then to negotiate a franchise fee and operating principles to ensure the City of Grand Terrace and Riverside Highland Water preserve city infrastructure.
Duffey indicated the dialogue he had with the Riverside Highland Water Company officials was not fruitful.
“The City Council of Grand Terrace approved a contract to engage a water attorney to compel Riverside Highland Water to produce documentation to resolve this issue,” Duffey wrote in the letter. “Riverside Highland Water has and continues to rebuke the city’s request to resolve this matter. I still maintain the premise of our original letter to Riverside Highland Water in April 2016, that Riverside Highland Water is a valued partner within the City of Grand Terrace. However, a partnership is based on both parties benefiting from the relationship.”
Duffey rejected the suggestion that what the city was doing was using the imposition of the franchise fee to layer onto the city’s residents another tax.
“The city cannot impose a tax unless authorized by the electorate and the State of California highly regulates a city’s ability to impact the fees charged by utilities,” Duffey wrote. “However, state law does authorize cities to impose a franchise fee. A franchise fee is in effect a rental payment or a toll for the use of the streets. The franchise fee is not a tax but rather a means for the heaviest users of the streets to pay the cost of maintenance caused by their use. The State of California authorizes a franchise fee for electricity, gas, telephone, cable, water and trash. State law authorizes a city, such as the City of Grand Terrace, to charge a franchise fee of not more than two percent but not less than one percent of a water company’s revenue, and it is true that the utilities often pass this charge on to their consumers. The charge usually appears on the consumer’s bill as a separate line item, but this is not required by law. The Riverside Highland Water Company is a mutual water company and is not a public utility regulated by the Public Utilities Commission like in most urban areas. However, it has been afforded all rights of a public utility in the City of Grand Terrace’s Municipal Code. Like all other utilities, it does not need a business license and it has full access to place new and repair existing infrastructure. Every business has a direct overhead or operating costs. California Law requires a mutual water company deliver water to shareholders at cost. If the law requires a water agency to pay a franchise fee of two percent annually to a municipality and it is not paid because it’s a mutual water agency, the business expense doesn’t go away. The city is now subsidizing the mutual water agency and that is in direct violation of California Law. I understand that this issue has been weaponized to appear as an unfair ‘water tax.’ However, Riverside Highland Water’s general manager and board are aware of the city’s request and refuse to comply with the law or provide proof of Riverside Highland Water’s exemption from the law.”
Complicating the issue is that Grand Terrace Mayor Darcy McNaboe’s husband, Jim McNaboe, is the designated secretary/treasurer on the Riverside Highland Water Company’s board of directors.
While Darcy McNaboe had abstained from voting with regard to the legal action relating to the Riverside Highland Water Company, questions have ensued over whether she has remained absolutely neutral with regard to the back-and-forth between the city and the water company. Jim McNaboe is also the administrator of Facebook 92313, a local blog which in the past has eschewed what the McNaboes referred to as “political content,” removing in short order postings which fall within the rubric relating to controversy in government or politics. Nevertheless, of late, Facebook 92313 was serving as a sounding board with regard to the contretemps between the city and the water company, with virtually all of the comment running in favor of the water company’s position and against the city. Those comments were not removed.
Robles told the Sentinel, “There are impacts from the water company’s operations on city streets. As a council, it is our responsibility to see that our own infrastructure is maintained. In this case our responsibility is to oversee the collection of that money from the water company to cover the impact. If we do not do that, the city will have to make cuts to other aspects of our own operations.”
The city and the company are due for an appearance in Department 26 of San Bernardino Superior Court on January 8. “Our attorney intends to tell the court that we have these presumptive rights,” Robles said. “We will hear what the judge has to say.”

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