Short of going to trial, the City of Grand Terrace and the Riverside Highland Water Company have come to a stipulated judgment resolving a disagreement between the two entities that grew out of the city’s insistence that the water utility pay a franchise fee it has avoided since the city’s incorporation in 1978.
A dispute arose in recent years regarding the city’s right to impose such a franchise fee upon Riverside-Highland for the use of city streets.
For years the city had neglected to impose any fee or surcharge on the water utility. But a few years back, city officials came to the realization that by virtue of the city’s accommodation of the company’s operations within its jurisdiction, it had such a right. As of last year, the City of Grand Terrace estimated it had forgone some half of a million dollars in revenue by not collecting franchise fees in the past. The company maintained 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 last year. In response, the company maintained it had 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 it sent out to the city’s residents last November is tantamount to a tax and therefore constituted 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 has 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 give 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.
It was thus the Riverside Highland Water Company’s contention 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 2017 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 levied 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. Jacks 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. Jacks 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 plaintiff, 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 the discovery that since its inception as a municipality in 1978 the city had not collected franchise fees, in 2016 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 in April 2017. In June 2017, the California Supreme Court ruling in the Jacks case emboldened city officials further.
Grand Terrace city officials asserted that for the entire length of its existence as a municipal entity, the City of Grand Terrace had 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.
In response to the city’s promptings, the water company contended 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 insisted that it predated the incorporation of the city and had utility easements that granted it unobstructed access to its system. The city asked the company to produce the documents memorializing those easements. The company was not able to provide that documentation.
The company claimed that the California Constitution allows utility companies to form in the absence of local government and thus without its permission and without being subject to its authority. The city conceded that point but insisted the California Constitution did not prohibit a local governmental entity from asserting its property rights once it is in existence. As the owner of the property, the city asserted it had a right to the fee.
The city said it would forego seeking reimbursement on the fees it has not collected, but intended to impose a fee going forward.
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, seeking “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, 2017, the water company sent a letter to its customers, asserting that 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 and that “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.”
Grand Terrace Mayor Darcy McNaboe’s husband, Jim McNaboe, is the designated secretary/treasurer on the Riverside Highland Water Company’s board of directors. Darcy McNaboe abstained from voting with regard to the legal action relating to the Riverside Highland Water Company.
At its July 26, 2018 meeting, the Grand Terrace City Council ratified a stipulated judgment in the case, and authorized the release of a joint statement between the City of Grand Terrace and Riverside Highland Water Company.
According to Grand Terrace City Manager G. Harold Duffey, “In order to avoid prolonged litigation and to finally resolve the dispute, the parties wish to enter into a stipulated judgment. The parties agree to the following:
• The City of Grand Terrace is duly authorized under the Franchise Act of 1937 to charge utilities, including mutual water companies, a franchise fee for the use of city streets and rights of way;
• A franchise fee is a statutorily authorized charge or fee; if property imposed, it is not a tax;
• A prorated franchise fee of $11,500 shall be due September 1, 2018. Thereafter, annual franchise fee payments shall be due and paid by the Riverside Highland Water Company March 1 of each successive year, commencing March 1, 2019. The Riverside Highland Water Company shall pay to the city an annual franchise fee of $23,000.”
The Sentinel has obtained a copy of the stipulated judgment signed by Andrew D. Turner as the attorney for the plaintiff, the City of Grand Terrace, and Steven M. Kennedy, the attorney for the defendant, the Riverside Highland Water Company.
In addition to the commitment to make the prorated fee installation of $11,500 on September 1, 2018 and pay an annual franchise fee of $23,000 beginning in 2009, the stipulated judgment states, “The city hereby waives any claim against Riverside Highland Water Company for street cutting or other related fees for excavating in city streets that would have accrued prior to January 1, 2018. The city also waives any right it may have to collect a franchise fee, other than the franchise fee provided for herein, or other fee, charge, tax, or assessment from Riverside Highland Water Company relating to the subject matter of this litigation under any legal theory that may otherwise be available under the law, provided, however, that Riverside Highland Water Company will still be obligated to pay street cutting and related fees for future work performed in city streets.”
In their joint statement, the city and company propounded “To avoid prolonged litigation and incurring any additional legal costs, the city and Riverside Highland Water Company have entered into a stipulated judgment to forever resolve this ongoing dispute. As a result, the Riverside Highland Water Company has agreed to pay to the city an annual franchise fee in the amount of $23,000 (as may be periodically adjusted to reflect any future increases in Riverside Highland Water Company’s water consumption rates and bi-monthly meter charges). The Riverside Highland Water Company acknowledges that this mutually-negotiated franchise fee is not a tax and constitutes compensation for the use of government property, in this case, access to city streets to provide water delivery services to Riverside Highland Water Company customers.
The City of Grand Terrace acknowledges that the Riverside Highland Water Company is a mutual water company providing water utility services within the incorporated boundaries of the City of Grand Terrace, and that Riverside Highland Water Company and the city continue to collaborate to coordinate repairs to infrastructure within the city to maximize efficiency and extend the life of city’s and Riverside Highland Water Company’s infrastructure. The city acknowledges that Riverside Highland Water Company, upon notice by the city, consistently pays its street cut fees and has no outstanding obligations to the City of Grand Terrace. The city further acknowledges that it will not seek to collect any other fee, tax, charge, or assessment from Riverside Highland Water Company relating to the use of city streets.”
The statement continues, “The city council of the City of Grand Terrace and the board of directors of the Riverside Highland Water Company acknowledge that both parties are committed to work together toward the delivery of quality services to maintain the quality of life for residents and business owners within the City of Grand Terrace.”
–Mark Gutglueck