Court Opinion

ID: 8406976
Source: CourtListenerOpinion
Date Created: 2022-10-31 21:03:11.993494+00
Date Added: 2024-06-11T16:47:22.748472
License: Public Domain

Filed 10/31/22 Saavedra v. City of Glendale CA2/5
   NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                         SECOND APPELLATE DISTRICT

                                        DIVISION FIVE

 JUAN SAAVEDRA et al.,                                            B310212

           Plaintiffs and Appellants,                             (Los Angeles County
                                                                  Super. Ct. No. BC539160)
           v.

 CITY OF GLENDALE,

           Defendant and Respondent.

     APPEAL from a judgment of the Superior Court of
Los Angeles County, James C. Chalfant, Judge. Affirmed.
     Schwartz, Steinsapir, Dohrmann & Sommers, D. William
Heine and Daniel E. Curry for Plaintiffs and Appellants.
     Colantuono, Highsmith & Whatley, Michael G. Colantuono,
David J. Ruderman, Jon R. di Cristina; City of Glendale,
Michael J. Garcia and Christine A. Godinez for Defendant and
Respondent.
                     ——————————
       Plaintiffs and appellants Juan Saavedra and the
International Brotherhood of Electrical Workers Local 18, AFL-
CIO (collectively the Union) appeal from the trial court’s
judgment, contending the court erred by ruling that defendant
and respondent City of Glendale (the City) did not raise taxes
without voter approval in violation of article XIII C of the
California Constitution when in 2013 it increased its electric
utility’s rates for subsequent years.
       On appeal, the Union argues that the trial court incorrectly
calculated the tax included in the utility rates adopted in 2013,
and that the trial court’s comparison of the tax imposed in 2013
to the tax previously imposed through rates adopted in 2006 was
fundamentally flawed. The Union further contends that the trial
court erred by abandoning this court’s formula for determining
the amount of tax included in utility rates, as set forth in our
prior opinion.1
       We find no error in the trial court’s methodology or
calculations. We conclude that substantial evidence supports the
trial court’s findings and affirm the judgment.

      1 In light of our disposition, we do not address the other
contentions raised in the Union’s opening brief. Any issues
raised for the first time in the Union’s reply brief are waived.
(See Lester v. Lennane (2000) 84 Cal.App.4th 536, 595 [claims of
error raised for the first time in reply brief are waived].)

                                 2
      BACKGROUND AND PROCEDURAL HISTORY2

Background

      Glendale Water and Power (the Utility) is a department
within the City that operates an electric utility. Article XI,
section 22 of the City’s charter has long provided for an annual
transfer (the GFT) from the Utility’s revenue fund to the City’s
general fund.3 The City council may reduce or waive the GFT to
insure the sound financial position of the Utility. (Ibid.)
      California voters enacted a series of voter initiatives
beginning with Proposition 13 in 1978, amending the California

      2 The following background and procedural history are
summarized from our prior unpublished opinion in Saavedra v.
City of Glendale (Dec. 27, 2018, B281991) (Saavedra I). For
purposes of this appeal, we discuss only the procedural history
subsequent to Saavedra I in depth.
      3 Section 22 of article XI of the charter provides: “A fund to
be known as the Glendale Water and Power surplus fund is
hereby created, to which fund shall be credited from the receipts
of the department of Glendale Water and Power in the
waterworks revenue fund and the electric works revenue fund,
any amounts in excess of the requirements of the several funds as
hereinbefore set forth. Except as otherwise provided in this
section, disbursements from said Glendale Water and Power
surplus fund may be made by the council by special appropriation
for waterworks or electric works purposes only, which shall
include payment of all or any portion of the tax of the
Metropolitan Water District of Southern California, or its
successors in interest, which the council may elect to pay out of
the funds of the City of Glendale. [¶] At the end of each fiscal
year an amount equal to twenty-five (25) percentum of the

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Constitution to limit the ability of state and local governments to
collect revenue through taxes, fees, charges, and other levies
without voter approval. (Cal. Const., arts. XIII A, XIII C, XIII D.)
Proposition 218 added article XIII C to the California
Constitution in 1996. (Howard Jarvis Taxpayers Assn. v. City of
Fresno (2005) 127 Cal.App.4th 914, 918.) Article XIII C prevents
local governments from assessing general or special taxes
without obtaining voter approval. Under article XIII C, local
governments may not impose, extend, or increase a general tax
without obtaining approval from a majority of the voters, or
impose a special tax without approval of two-thirds of the voters.
(Cal. Const., art. XIII C, § 2, subds. (b), (d).)
       A “[g]eneral tax” is “any tax imposed for general
governmental purposes.” (Cal. Const., art. XIII C, § 1, subd. (a).)
A “[s]pecial tax” is “any tax imposed for specific purposes,
including a tax imposed for specific purposes, which is placed into
a general fund.” (Id., art. XIII C, § 1, subd. (d).) “Local
government” includes “any county, city, . . . charter

operating revenues of the department of Glendale Water and
Power for such year, excluding receipts from water or power
supplied to other cities or utilities at wholesale rates, shall be
transferred from said Glendale Water and Power surplus fund to
the general reserve fund; provided, that the council may
annually, at or before the time for adopting the general budget
for the ensuing fiscal year, reduce said amount or wholly waive
such transfer if, in its opinion, such reduction or waiver is
necessary to insure the sound financial position of said
department of Glendale Water and Power and it shall so declare
by resolution. (1921; 1931; 1941; 1946; 1949.) [¶] (Res. No. 04-
238, § 1, 12-7-2004).”

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city, . . . special district, or any other local or regional
governmental entity.” (Id., art. XIII C, § 1, subd. (b).)
        “A tax is imposed when first enacted. [Citation.] A tax is
extended when an agency lengthens the time period during which
it applies. [Citation.] A tax is increased when an agency revises
its methodology for calculating a tax and the revision results in
increased taxes being levied on any person or parcel.” (Webb v.
City of Riverside (2018) 23 Cal.App.5th 244, 258 (Webb).)

      The City Increases Retail Rates in 2006

       In May 2006, the City amended the Glendale Municipal
Code to increase electric rates, effective July 1, 2007, based on a
staff report to the city council prepared that same month (2006
Staff Report). The 2006 Staff Report recommended approval of
two ordinances amending electric rates effective July 1, 2006, and
July 1, 2007, respectively.
       The 2006 Staff Report projections showed that retail rates
would be insufficient to fully recover the costs of service provided
to customers through electric operations and that under-
collection of fuel adjustment charges for the purchase of natural
gas had caused the Utility to suffer financial losses. The
financial objectives that the Utility sought to achieve through the
rate increases included generating sufficient cashflow from
operations to fund capital improvement projects within five years
and generating sufficient cashflow in excess of sustaining capital
improvement projects to replenish and maintain reserves to the
desired levels as set forth in the cash reserve policy within 10
years.

                                 5
       The 2006 Staff Report described the retail rate structure:
“There are two components in [the Utility] electric rate structure:
a base rate component and a fuel adjustment component. The
base rate is designed to recover the direct and indirect costs of
providing the infrastructure to serve local customers. Such costs
include, but are not limited to, the costs associated with
transmission and distribution, customer service, and
administration. The base rate should also include a reasonable
rate of return on investments to effectuate the transfer to the
City’s General Fund, and to establish sufficient reserves for
ongoing capital improvement projects that ensure the reliability
and integrity of the system infrastructure and upgrade the
generation assets to improve the cost structure and
competitiveness of the energy resources.” The fuel adjustment
component imposes a fuel adjustment charge (FAC) on each rate
to recover the costs of fuel and purchased power.
       The 2006 Staff Report made projections for fiscal year 2007
to 2008 based on the proposed increases as follows:

FISCAL YEAR                                            2007-2008
Base Revenues                                        $104,847,000
Base Expenses                                        $110,501,000
FAC Revenues                                          $57,938,000
FAC Expenses                                          $56,530,000
Transfers (included in                               -$18,254,000
Base Revenues)

                                 6
      The Voters Pass Proposition 26 in 2010

      Proposition 26, effective in November 2010, added
subdivision (e) to article XIII C, section 1. Subdivision (e) broadly
defines a “tax” for purposes of article XIII C to mean “any levy,
charge, or exaction of any kind imposed by a local government,”
with seven exceptions. (Cal. Const., art. XIII C, § 1, subd. (e).) If
a charge falls within one of the exceptions, the charge is not a tax
as a matter of law. (California Building Industry Assn. v. State
Water Resources Control Bd. (2018) 4 Cal.5th 1032, 1048.) As
relevant in this case, a tax does not include a “charge imposed for
a specific government service or product provided directly to the
payor that is not provided to those not charged, and which does
not exceed the reasonable costs to the local government of
providing the service or product.” (Cal. Const., art. XIII C, § 1,
subd. (e)(2).)

      The Utility Reduces Its Workforce in 2012

       In June 2012, the Utility made an annual GFT,
transferring $21,107,000, from its revenue fund to the City’s
general fund. In October 2012, the City notified Utility
employees that a reduction in force was necessary due to a
shortfall in the electric fund. The amount of the shortfall was
equal to approximately half of the GFT.
       At the end of the 2013 fiscal year, the Utility transferred
$20,857,000 to the City’s general fund. The Utility’s cash reserve
funds were reduced to 59.4 percent of the required cash reserve
level.

                                  7
      The City Raises Retail Rates in 2013

       In 2013, the City’s general manager submitted a report to
the city council recommending that the City increase electric
rates over five years as follows: 8 percent in fiscal year 2014;
7 percent in 2015; 5 percent in 2016; 2 percent in 2017; and
2 percent in 2018. The recommended rate plan would accomplish
several objectives and bring the Utility closer to its cash reserves
goal of $124 million, although the Utility would remain short of
the target balance for reserves by approximately $10 million.
The report listed measures the City had taken to reduce the
Utility’s operating costs, including reducing the amount that the
Utility transferred annually to the general fund by $250,000 per
year.
       The City employed a rate consultant company in 2013,
Borismetrics, who completed a cost of service analysis and
electric rate design study (the Rate Study) for the Utility based
on data from fiscal year 2012. To perform the Rate Study,
Borismetrics relied in part on a pro forma financial model (the
Pro Forma) prepared by City staff that “project[ed] expenses and
revenues from fiscal year 2013–14 through fiscal year 2017–18
under various assumptions, such as rate changes, cash reserve
levels and power and fuel costs.” The Rate Study concluded that
“to maintain financial viability, debt service coverage and cash
reserve margins, average annual retail rate increases of 8%, 7%,
5%, 2% and 2% are required for fiscal years 2013-14 through
2017-18, respectively.”
       The Rate Study stated that absent increases in retail rates,
“Cash Reserves . . . [would] deteriorate[ ] significantly. Shrinking
cash reserves undermine[ ] debt service coverage, and thus

                                 8
ultimately lead[] to no future capital investments . . . required to
maintain the [Utility] electric system. Currently, retail revenues
do not cover all of [the Utility] costs, so Cash Reserves are and
have been used instead. As a result, cash balances have declined
to an unsustainably low position.” “With the proposed series of
annual rate increases, [the Utility]’s financial situation recovers
over the five year planning horizon. Cash reserves approach but
do not reach the City Council’s policy target of $124 million and
the utility should be able to sustain a pay-as-you-go capital
program in addition to borrowing for capital investments.”
       The Rate Study included a summary of the Utility’s
revenue requirements for fiscal year 2012. The Rate Study
recategorized the revenues and expenses contained in the Pro
Forma for purposes of its cost of services analysis. The Rate
Study explained, “The objectives of a cost of service study are
different from those of determining revenue requirements for the
utility.” A “revenue requirement analysis [(i.e., the Pro Forma)]
is concerned with comparing the projected operating revenues to
the projected operating and capital expenses for the utility to
determine an overall adjustment to rates.”
       The Rate Study categorized rate requirements in fiscal year
2012 differently than the Pro Forma for purpose of allocating
costs among the Utility’s four customer classes. Costs were
identified as follows: power and transmission costs of
$148,342,000, distribution costs $42,349,000, and customer
service costs of $7,073,000, for a total revenue requirement of
$197,764,000. Within those categories, two subcategories were
characterized as nonoperating expenses: “Power Management
Non-Operating Expenses” of $5,946,000 (in the power and
transmission category) and “Electric Services Non-Operating

                                 9
Expenses” of $19,143,000 (in the distribution category). A GFT
charge was listed separately as a “Transfer to Other Funds” in
the amount of $21,107,000.
       The Pro Forma that the Rate Study relied upon included
the following projections based on the recommended rate
increases:

FISCAL              2014           2015           2016           2017           2018
YEAR
Operating    $170,690,622   $183,552,160   $193,693,417   $198,562,343   $203,546,257
Revenue
Non-           $7,851,641     $8,027,381     $8,099,475     $9,023,217     $9,111,882
operating
Revenue
Operating    $164,897,661   $159,994,172   $161,806,252   $164,870,129   $170,220,575
Expenses
Non-           $5,137,265     $5,208,425     $5,147,675     $6,996,456     $8,260,806
operating
Expenses
Transfers     $20,607,000   $20,357,000    $20,107,000     $19,857,000   $19,607,000
to Other
Funds
Retail Net   -$12,099,663     $6,019,945   $14,731,965     $15,861,974   $14,569,759
Income

      In August 2013, the City voted to raise the Utility’s retail
rates for fiscal years 2014 through 2018. The rate increases
included allocations for annual GFT’s of $20,607,000 (FY 2014),
$20,357,000 (FY 2015), $20,107,000 (FY 2016), $19,857,000 (FY
2017), and $19,607,000 (FY 2018).

Procedural History

       In March 2014, the Union filed a complaint for declaratory
relief and petition for writ of mandate against the City, claiming
that the GFT violated the City’s charter and article XIII C of the

                                           10
California Constitution, endangered the sound financial position
of the Utility in violation of the City’s charter, and created the
shortfall in funds that caused Utility employees to lose their jobs
and suffer reductions in pay and benefits.4 The operative first
amended complaint contained nine causes of action and sought to
“obtain declaratory relief and a writ of mandate compelling the
City to abide by its obligations under the law and to restore the
improperly transferred funds to the electric works revenue fund,
make whole any City employees who have suffered financial
losses, and rebate to [the Utility]’s ratepayers any amounts paid
by them as a result of the unlawful transfer.” As relevant here,
the Union claimed that the GFT fell under California
Constitution article XIII C, section 1, subdivision (e)’s definition
of “tax” and that the tax was unlawfully imposed, extended, or
increased when the Utility’s retail rates were increased without
voter approval in 2013.5 The City filed an answer to the first
amended complaint and petition for writ of mandate.
       At a hearing on December 15, 2015, the trial court ordered
the issues of liability and remedy bifurcated for trial. The parties

      4 Glendale Coalition for Better Government (the Coalition),
a nonprofit corporation formed by residents of Glendale, filed a
petition against the City for writ of mandate, writ of prohibition,
and declaratory relief on February 25, 2014. The cases were
consolidated for purposes of trial only. We have omitted the
procedural history pertaining to the Coalition, which is not
relevant to this appeal.
      5   None of the Union’s other claims are at issue in this
appeal.

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submitted trial briefs and supporting evidence. The Union
submitted the declaration of accounting expert David Vondle.

The Trial Court’s Decision

      Liability

       A hearing on the petition for writ of mandate was held on
June 9, 2016. The trial court issued a tentative ruling, which it
later adopted as its order. The ruling delineated the issues as
follows: The parties agreed Proposition 26 applied prospectively,
but disagreed regarding how Proposition 26 should apply, and
disagreed as to whether the GFT amounts included in the retail
rates for fiscal years 2012 through 2015 were properly included
in those rates. The trial court noted that the City did not contest
that the GFT was included in the retail rates for the 2012
through 2015 fiscal years, or that the retail rates were increased
in 2013, or that the GFT was a transfer imposed to fund the
City’s general service needs and not part of the actual cost of
producing electricity.
       The trial court concluded that Proposition 26, which took
effect in November 2010, did not apply to retail rates containing a
charge for the GFT prior to 2013, because those rates were set
prior to its effective date. The court rejected the City’s argument
that the voters approved the GFT prior to Proposition 218 and
Proposition 26. The voters approved the transfer prior to the
propositions, but did not vote to impose retail rates on ratepayers
to fund the transfer. The court also rejected the City’s argument
that the GFT was a payment in lieu of property taxes and
franchise fees to the City, and therefore a reasonable cost of

                                12
providing service. The Utility did not pay property taxes or
franchise fees and could not impose imaginary costs on
ratepayers. The court found that the City’s argument that the
Utility was permitted to earn a modest profit as a reasonable cost
of service lacked merit in light of Proposition 26’s voter approval
requirement, which made no exception for modest profits.
Finally, the City’s argument that other revenues funded the GFT
lacked merit, because the City conceded that a charge for the
GFT was expressly included in the 2013 retail rates. The City
further conceded that wholesale revenues did not exceed the GFT
in 2013, and the City did not provide evidence that wholesale
revenues exceeded the GFT in 2014 or 2015.
       The trial court ruled the Union was entitled to a
declaration that the City violated Proposition 26 by including an
amount to fund the annual transfers in the 2013 retail rate
increases and in charges to customers for fiscal year 2014. The
court denied the Union’s request for a writ of mandamus ordering
the reinstatement of employees based on the Proposition 26
violations.

      Remedy

       A second hearing on the petition for writ of mandate was
held on August 11, 2016. The trial court issued a tentative
ruling, which it later adopted as its order.
       The trial court rejected the City’s argument that any rebate
should be calculated as the difference between the amount of the
retail rate minus the amount of the lawful rate, offset by any
wholesale revenue used to fund the GFT. The court previously
determined there was insufficient evidence that wholesale

                                13
revenues funded the GFT and would not revisit that ruling. The
court also rejected the City’s contention that the retail rates were
inadequate to cover the cost of service, which included
maintaining reasonable reserves, and that the City should be
permitted recoup the entire amount required to replenish
reserves. The court found the funds were improperly collected
and the City should not be permitted to benefit by using the
funds for general purposes rather than replenishing the reserves.
The court agreed with the Union that the proper remedy was to
provide rebates or restitution to ratepayers in the amount of the
GFT collected, and so ordered.
       The City filed a motion for a new trial on November 21,
2016, which the trial court denied.
       The trial court entered judgment on January 26, 2017. The
City filed a timely notice of appeal from the judgment.

The Prior Appeal

      The City’s Arguments

       As relevant here, on appeal the City argued that the GFT
was not a tax because Proposition 26 is not retroactive and did
not vitiate the legislation that established the GTF decades
earlier. Rather, the GFT was “grandfathered” in as a lawful cost
of electrical service. The GFT was not invalidated post-
Proposition 26 because the City did not impose, extend, or
increase the GFT after its passage. The City alternatively
contended that even if the GFT were a tax, it was: (1) properly
approved by voters prior to the passage of Proposition 26, (2) a
reasonable cost of service because it approximated the taxes a

                                14
private utility would pay to the City, and (3) not imposed on
retail rate payers because it was funded by wholesale revenue.
Finally, the City argued that if this court concluded that the GFT
was an unlawful tax, the proper remedy would be recovery of the
difference between the rate paid and the full costs of the Utility’s
service. The full costs of service included debt service and the
amount required to replenish reserves, and must be offset by
wholesale revenue used to fund the GFT. The City asserted that
the Union was estopped from arguing that wholesale revenue
could not offset the remedy. Regardless, the City was not
obligated to show it identified wholesale revenues as a funding
source in its budget for the relevant years in order to apply the
offset.

      The Union’s Response

       The Union responded that the portion of the 2013 retail
rate increase allocated to fund the GFT was a tax under
California Constitution, article XIII C. The City’s contention that
Proposition 26 was not retroactive was specious—neither the
Union nor the trial court took a contrary position—it was simply
a creative way for the City to conflate the issues of retroactivity
and “grandfather[ing]” to argue that it could continue to charge
retail rate payers for the GFT indefinitely. California
Constitution, article XIII C, section 2, subdivision (b) required
voter approval in the event that the GFT was imposed, extended,
or increased after 2010. The City’s contention that the GFT was
a reasonable cost of providing services mischaracterized the
GFT—it was simply an interfund transfer imposed to provide
revenue for general purposes, i.e. a tax. The Utility is not a

                                 15
private utility. Any charge in lieu of taxes is an imaginary cost.
The City’s argument that the voters approved the GFT should
also fail. The voters did not approve the GFT after Proposition 26
became effective in 2010 and the GFT became a tax. The City did
not actually fund the GFT with wholesale revenues; the fact that
it could have done so is irrelevant. As the trial court concluded,
the amount of the GFT embedded in the retail rate increase
determined the tax. It was irrelevant that other revenue may
have been available to fund the GFT. Finally, this court should
not reduce the remedy fashioned by the trial court. Restitution
should be in the amount of full GFT charge, which was
unlawfully imposed.

      The Supreme Court’s Decision in Redding

       After the parties submitted briefing on the prior appeal,
our Supreme Court issued its decision in Citizens for Fair REU
Rates v. City of Redding (2018) 6 Cal.5th 1 (Redding).
       In Redding, supra, 6 Cal.5th at page 4, a city operating an
electric utility included a transfer from the utility’s enterprise
fund to the city’s general fund that was designed to compensate
the city for services other city departments provided to the
utility. The question before the Supreme Court was “whether
article XIII C applies to this interfund transfer and, if so, how.”
(Ibid.)
       Redding, supra, 6 Cal.5th at page 12, held that an annual
transfer itself is not a tax. “It is only the rate, not the [intrafund
transfer], that is imposed on customers for electric service.”
(Ibid.) The “budgetary act of transferring sums from one fund to
the other does not constitute’ the imposition of a levy, charge, or

                                  16
exaction by a local government on those who pay the charge.”
(Ibid.)
       Redding, supra, 6 Cal.5th 1, then addressed whether the
rate was a tax. The Supreme Court held that a rate is a tax if
“the rates paid by . . . customers exceed[ ] the reasonable costs of
providing electrical service.” (Id. at p. 15.) “The reasonable costs
include expenditures to generate and acquire electricity and
other costs typical of utility operations. (Hansen v. City of San
Buenaventura (1986) 42 Cal.3d 1172, 1181; see also [Howard
Jarvis Taxpayers Assn. v. City of] Roseville [(2002)]
97 Cal.App.4th [637,] 647–648 [‘what it costs to provide such
services includes all the required costs . . . , short-term and long-
term, including operation, maintenance, financial, and capital
expenditures.’]) The city bears the burden of proof on this
question. (Art. XIII C, § 1, subd. (e), unenumerated par.)”
(Redding, supra, 6 Cal.5th at pp. 15–16.)
       The plaintiffs in Redding, supra, 6 Cal.5th at page 16,
argued that the rate was a tax because the rate incorporated the
transfer to the general fund as an expense, and the defendants
had not shown that the transfer reflected any costs of providing
electric service. The city responded that the rate was not a tax
because the utility generated sufficient nonrate revenue to fund
the transfer. (Ibid.)
       The Redding court held: “the mere existence of an
unsupported cost in a government agency’s budget does not
always mean that a fee or charge imposed by that agency is a tax.
The question is not whether each cost in the agency’s budget is
reasonable. Instead, the question is whether the charge imposed
on ratepayers exceeds the reasonable costs of providing the
relevant service. If the agency has sources of revenue other than

                                 17
the rates it imposes, then the total rates charged may actually be
lower than the reasonable costs of providing the service.”
(Redding, supra, 6 Cal.5th at p. 17.)
       The Supreme Court reversed the Court of Appeal,
concluding: “The record shows that to be the case here. The city
prepared a five-year financial plan for [the electric utility] in
2009. [Citation.] In fiscal year 2010 to 2011, when the city
council adopted the rate increase, [the electric utility] was
projected to collect $102.1 million in rate revenues. [The electric
utility’s] expenses were projected as follows: power supply
($82.3 million); operations and maintenance ($28.5 million); debt
service ($13.9 million); revenue-funded capital projects
($5.2 million); rolling stock and major plant maintenance
($0.8 million); and the [annual transfer] ($6 million). These
projected expenses would result in a $34.6 million shortfall
between rate revenues and projected expenses. That gap was to
be bridged with the surplus in the enterprise fund and revenues
from a variety of nonrate sources.” (Redding, supra, 6 Cal.5th at
p. 17.) The Redding court held the rate was not a tax, because
even if the annual transfer was not included in the in projected
expenses, the rate charged would not exceed the reasonable costs
of providing electrical service for the years in question. (Ibid.)
The rate was substantially less than the reasonable costs;
nonrate revenue subsidized the costs of service. (Ibid.)
Ratepayers are not entitled to discounted rates simply because
the utility has other sources of revenue. (Id. at p. 18.) Although
a city may use nonrate revenue to subsidize retail rates, it is not
required to do so. (Ibid.)

                                18
      Supplemental Briefing

       We invited the parties to submit briefing to address the
impact of Redding, supra, 6 Cal.5th 1.
       In its supplemental brief, the City contended that under
Redding, the GFT itself was not a tax. Because there was no
increase in the GFT charge contained in the rate increase,
Proposition 26 was not triggered and the GFT charge was not a
tax, either. An increase only occurs “when an agency revises its
methodology for calculating a tax and the revision results in
increased taxes being levied on any person or parcel.” (Webb,
supra, 23 Cal.App.5th at p. 258.) There was no change in
methodology and the flat rate of the GFT charge decreased over
time. Mere annual variation in the GFT charge does not trigger
Proposition 26.
       The City further contended that the GFT charge was not a
tax because the Utility had sufficient nonrate revenue, including
sales to other utilities and wholesale revenues, to fund the GFT.
Redding does not require the Utility to allocate nonrate revenue
to cover a specific cost, the nonrate revenue need only be
available to pay the cost. Moreover, the GFT charge was not a
tax because it is a cost of service—the cost of complying with local
laws. Finally, even if this court was to find the GFT charge was a
tax, remand is required to calculate the remedy to consider net
nonrate revenue and the shortfall in reserves.
       In its supplemental brief, the Union argued that Redding
was distinguishable. There, retail rates were insufficient to cover
the reasonable costs of providing service even excluding the
annual transfer charge. (Redding, supra, 6 Cal.5th 1.) Nonrate
revenues necessarily covered the cost of the annual transfer, so

                                19
the annual transfer could not have been a tax paid by ratepayers.
Here, retail rate revenue exceeded the costs of service. The City
conceded that the GFT was not a cost of providing electrical
service. The Pro Forma showed that the rates charged were
designed to exceed operating costs.
       The Union further contended that wholesale revenue did
not fund the GFT. The Redding court only found that nonrate
revenue funded the annual transfer in that case because there
was a shortfall and retail rates could not have funded the
transfer. Here the opposite was true. The retail rates were
sufficient to cover the costs of service and the GFT charge. In
fact, wholesale revenues and expenses were not even included in
the Pro Forma calculation of revenue requirements. It is
irrelevant that other sources could have been used to pay the
GFT because they were not used. Regardless, net wholesale
revenues were insufficient to fund the GFT. Wholesale expenses
must be deducted from revenues before they may be applied to
the GFT charge. Significantly, the Pro Forma did not project any
wholesale revenue.
       Finally, the Union argued that the tax equaled the full
charge to ratepayers, not the amount in excess of the costs of
providing service.

      Saavedra I

      This court reversed the portion of the trial court’s judgment
that concerned tax violations. We concluded that an intrafund
transfer is a budgetary allocation and not a tax under Redding.
Only the rate is imposed on ratepayers for the costs of electric

                                20
service. The rate is a tax if it exceeds the reasonable costs of
providing service.
       We rejected the City’s argument that funding the GFT was
a cost of providing service. The GFT differs from taxes and fees
imposed by the state and federal governments, which may be
passed on to ratepayers. The Utility is only required to transfer
funds under certain conditions. If there are no surplus revenues,
the GFT cannot be paid. The transfer provisions do not require
the City to charge the ratepayers any amount to produce a
surplus to fund the transfer. The GFT can only be recouped from
the ratepayers to the extent that it pays the Utility’s expenses.
The City did not claim that the GFT paid for any actual costs of
providing electricity. We therefore concluded that the GFT was
not a cost of providing service.
       We next discussed the calculation of reasonable costs. We
held that “the reasonable costs of service are measured by the
amount of costs that the utility projected it would need to pay
when the rates were adopted. If the rates were constitutional at
the time they were imposed, extended, or increased, they do not
subsequently become unconstitutional because actual costs vary
from projections. The amount of reasonable costs includes the
total costs projected to provide service when the rates are
adopted, even if the utility intends to pay a portion of the costs
with non-rate revenue.” “[R]atepayers bear the burden of
covering the costs of their service, and have no right to benefit
from a utility’s receipts of non-rate revenue in the calculation of
rates.”
       We concluded that when the 2013 rates were adopted, the
rates were not set to recoup the entire amount necessary to fund
cash reserves that had been mandated by prior regulation. The

                                21
unfunded portion of the reserves could not be considered a
reasonable cost of providing service because it was not a projected
cost.
       We could not calculate the reasonable costs of providing
service, because there were unresolved issues of fact regarding
the Utility’s reliance on nonrate revenues to fund the GFT. In
particular, the parties disagreed whether wholesale revenues
reduced the costs recovered by ratepayers, and whether the
amount of wholesale revenue available to reduce costs was net
wholesale revenue or gross wholesale revenue. We concluded
that it was necessary to remand to the trial court to make these
factual determinations in the first instance. We observed that,
under either party’s calculations, wholesale revenues did not
fully cover the projected cost of the GFT. We therefore included
guidance to the trial court to aid it in resolving whether the
amount in excess of the reasonable costs of providing service was
a tax that required voter approval.
       We concluded that a tax in this context is the portion of the
retail rate that exceeds the reasonable costs of providing service,
not the entire rate, as the Union argued.
       We included a section entitled “Additional Facts” in our
guidance, which contained calculations comparing operating
revenues to operating expenses, less any included GFT charges.
We calculated that the rate revenue collected after the 2006 and
2007 rate increases as reflected in the 2006 Staff report exceeded
the costs of service by $12,600,000, yielding a tax rate of
13.66 percent. We concluded that, using the Rate Study’s
projections for the 2014 fiscal year, rate revenue exceeded
expenses by $5,792,961, or 3.51 percent of operating expenses.
We noted that it was unclear whether reserves were an included

                                22
expense. As to fiscal years 2015 through 2018, we noted that
rates were set to increase (7 percent, 5 percent, 2 percent, and
2 percent, respectively) and that the rate revenue was expected to
fund all but $9.6 million of the cash reserves requirement. We
found that the excess operating revenues in 2018 would either
equal $33,325,682 (19.58 percent) or $18,755, 923
(11.02 percent),6 depending on whether the Utility intended to
contribute to its cash reserves.
       We held that the portion of the rate that exceeded the
reasonable costs of providing service only required voter approval
if it was imposed, extended, or increased after Proposition 26 was
passed in November 2010. A tax will only be deemed to have
increased if it is imposed at a rate higher than the maximum rate
that was previously approved. (Cal. Const., art. XIII C, § 2,
subds. (b) & (d).) We concluded that the GFT charge was not
improperly imposed in 2006 when retail rates were last set, as it
did not fall within the definition of a tax at that time. Because
the GFT charge was already included in the 2006 rates, the City
did not impose the GFT charge when it increased retail rates in
2013. Moreover, the 2013 retail rate increase did not extend the
GFT charge, because the 2006 rates had no termination date that
would require an extension to continue.
       However, we remanded the cause for the trial court to
“determine from the conflicting evidence about revenues and
costs employed in the rate setting process whether the excess
amount of the charge was increased in the 2013 rates from the

      6 As the Union notes, our math was incorrect for this latter
number. The tax rate would equal 10.15 percent, not
11.02 percent.

                                23
amount of the charge under the 2006 rates” in the first instance.
(Italics added.)

      The Trial Court’s Decision on Remand

      On remand, the trial court rejected the Union’s argument
that the tax could be greater than the amount of the GFT.
Although the burden is on the City to prove an expense is
reasonable, here the Union never challenged any charge other
than the GFT, and had therefore waived the argument.
      Next, the trial court found that projected reserves are a
reasonable cost of providing service. Although reserves did not
appear as a line item cost on the Pro Forma or the Rate Study,
cash generated from operations generally is used to increase
reserves. Reserves may be projected from any source of funds
and imposed on ratepayers as a reasonable cost of service. The
Pro Forma showed that the Utility expected to generate
approximately $39 million above costs other than reserves
between fiscal years 2013 to 2014 and 2017 to 2018. The record
demonstrated that any revenue generated in excess of the 2013
rates was earmarked for reserves. The report to city council
indicated the excess was intended to replenish reserves, although
not to the full recommendation of $124 million. The Union
offered no evidence to the contrary. Because the reserves were
projected, the amount projected must be included in the
calculation of the costs of service. In contrast, wholesale
revenues were not projected, and the City provided no evidence of
actual wholesale revenues, so the court declined to consider them.
      The trial court determined that this court’s calculation of
the 2006 tax, which did not include the FAC, was not binding. It

                                24
rejected the City’s argument that our remand was limited to
determining the amount of the 2013 tax and the question of
whether the tax increased between 2006 and 2013. The trial
court disagreed with the City’s argument that our decision was
law of the case. Our remand required the court to calculate
whether the tax increased, and to do so it could consider whether
our additional facts offered in guidance “state[d] the full picture.”
Our decision did not limit the trial court’s authority to determine
the 2006 tax. Significantly, neither party briefed the 2006 tax; on
appeal it was only discussed at oral argument. Nor was this
court’s conclusion about the 2006 tax law of the case. The factual
issues we addressed were not necessary to our decision.
       The trial court recalculated the 2006 tax to include FAC
revenues and FAC expenses, which the Staff Report explained
were both included in the rate structure:
       Base Rate Revenue ($104,847,000) + FAC Revenue
($57,938,000) = Total Retail Revenue ($162,785,000)
       (Base Rate Expenses ($56,530,000) + FAC Expenses
($56,530,000)) – GFT ($18,254,000) = Permitted Costs
($148,008,000)
       Total Retail Revenue ($162,785,000) – Permitted Costs
($148,008,000) = Excess Rate Revenue ($14,008,000)
       Excess Rate Revenue ($14,008,000) / Permitted Costs
($148,008,000) = Tax Rate 9.42 percent.
       The trial court reiterated that under Saavedra I,
ratepayers may be charged for all reasonable costs of service.
Costs do not include wholesale expenses if, as here, there is no
evidence that they are unrelated to service. Reasonable costs of
service do include nonoperating costs such as power
management, distribution, depreciation, and debt. The court

                                 25
rejected the Union’s argument that only the expenses shown in
the 2006 Staff Report that are also in the Pro Forma should be
compared to the 2006 Staff Report to determine whether the tax
rate has increased. Saavedra I held that all expenses must be
considered, and went so far as to indicate that reserves should be
included in the calculation.
       In light of the foregoing, the trial court found the City’s
calculations of permitted costs (operating income plus
nonoperating income plus reserves), excess (retail rates minus
permitted costs), and tax (excess divided by permitted costs) to be
correct. The chart below summarizes the findings, and related
calculations:

                                26
RATE YEAR                 2014           2015           2016           2017           2018
Operating          $170,690,622   $183,552,160   $193,693,417   $198,562,343   $203,546,257
Revenue (retail)
Non-Operating        $7,851,641     $8,027,381     $8,099,475     $9,023,217     $9,111,882
Revenue
(non-retail)
TOTAL              $178,542,263   $191,579,541   $201,792,892   $207,585,560   $212,658,139
REVENUE

Operating          $164,897,661   $159,994,172   $161,806,252   $164,870,129   $170,220,575
Expenses
Non-Operating        $5,137,265     $5,208,425     $5,147,675     $6,996,456     $8,260,806
Expenses
ALL EXPENSES             $170,    $165,202,597   $166,953,927   $171,866,585   $178,481,380
                       034,926

TOTAL NET            $8,507,337    $26,376,944    $34,838,965   $35,718,975    $34,176,758
INCOME
GFT Charge         $20,607,000     $20,357,000    $20,107,000   $19,857,000    $19,607,000

Reserves (Net      -$12,099,663     $6,019,945    $14,731,965   $15,861,974    $14,569,759
Income After
GFT)

PERMITTED          $157,935,263   $171,222,542   $181,685,892   $187,728,559   $193,051,140
COSTS
(op + non-op +
reserves)
Excess (Op rev     $12,755,359     $12,329,618    $12,007,525   $10,833,784    $10,495,117
less Perm Costs)
TAX RATE                 8.08%          7.20%          6.61%          5.77%          5.44%
(Ratio of Excess
to Perm Costs)

       Because the tax rate embedded in the 2013 utility rates
would never exceed 9.4 percent, there was not an increase that
required voter approval, and the Union was not entitled to
monetary relief.
       On November 24, 2020, the trial court entered judgment
after remand. The court vacated the portions of the peremptory
writ of mandate issued on January 27, 2017, that commanded the
City to comply with article XIII C of the California Constitution

                                          27
by ceasing to include the GFT in retail rates and to provide credit
to ratepayers in installments in the amount of the GFT charged
to ratepayers. The Union timely appealed.

                          DISCUSSION

       The Union contends that the trial court erred by
calculating the amount of the tax paid by ratepayers using a
different formula than this court did in Saavedra I. The Union
argues that although we held in the prior appeal that the formula
for calculating the tax was operating revenue minus operating
expenses, on remand the trial court included two additional
factors—nonoperating expenses and the “net income” used to
fund reserves—which it subtracted from operating revenue to
determine the amount of tax. The Union contends that this
“apples to oranges” comparison is per se invalid. We find no error
in the trial court’s calculations.

The Trial Court Did Not Exceed the Scope of Our Remand
or Improperly Consider an Argument the City Waived

       We reject the Union’s contention that the trial court could
not consider expenses and/or revenues that we did not consider in
the first appeal to this court. We expressly remanded the case for
the trial court to resolve issues of fact in the first instance—
something it had not needed to do to reach its original decision.
In doing so, we noted that “the City is not limited to the costs
used to calculate rates in proving the total amount of the Utility’s
reasonable costs of service at the time rates were set.” Our
remand for the trial court to determine whether taxes increased

                                28
with the implementation of the new rates in 2013 over the taxes
imposed pursuant to the rates set in 2006 encompassed any
issues necessary to make that determination. That inquiry
necessarily included all factfinding regarding costs and revenues
during the relevant years. The trial court could properly consider
reserves and nonoperating costs. The trial court did not go
beyond the scope of our remittitur.7
       Nor did the City, by failing to make the point during the
prior appeal, waive its right to argue on remand that certain
expenses that had been labeled nonoperating expenses in the Pro
Forma in 2013 be included as costs of service. The Union did not
argue until remand that the nonoperating expenses identified in
the Pro Forma should not be included in cost calculations.
Rather, at the time of the prior appeal, the Union was
challenging the GFT and the charge for the GFT contained in the
retail rates. The City could not be expected to defend costs that
were unchallenged. Although the City bears the burden of

      7  We observe that the Supreme Court’s decision in Redding
shifted the parties’ focus in this litigation, and required the trial
court here to refocus its fact-finding. Prior to Redding, the
parties concentrated on the GFT. Redding, supra, 6 Cal.5th at
page 17, held that it was not necessarily unlawful for costs like a
transfer to a city’s general fund to be included in a utility’s
budget; the question was whether the rates paid by ratepayers
exceeded the reasonable costs of providing service. Although the
GFT charge remained significant in this case after Redding, the
emphasis shifted to the reasonable costs of providing service.
The GFT charge was significant because it was the only cost to
ratepayers that the Union had challenged, and because this court
had held the GFT charge was not a reasonable cost of providing
service.

                                 29
demonstrating that costs are reasonable, it bears that burden
only if the costs are contested. If waiver were to apply here, it is
the Union, and not the City, who waived the argument.

The Reasonable Costs of Providing Service Are Not Limited
to Operating Costs

       In Saavedra I, we consistently identified the portion of the
retail rate that could be deemed a tax as the amount ratepayers
paid in excess of the reasonable costs of providing service. The
Union ignores the prior opinion’s directive, instead claiming that
the prior opinion resolved that the amount of tax must be
calculated as “operating revenue” minus “operating expenses”
where only those costs specifically denominated by the City as
“operating expenses” can be considered. This court did not
address which of the Utility’s expenses were reasonable costs of
service in detail, because the trial court had not yet had the
opportunity to “determine from the conflicting evidence about
revenues and costs employed in the rate setting process whether
the excess amount of the charge was increased in the 2013 rates
from the amount of the charge under the 2006 rates.” We
indicated that reserves could be a reasonable cost of service if
they were projected as an expense at the time that rates were
increased. We did not restrict the reasonable costs of service to
items that were listed as “operating expenses.” Rather, we
discussed the record before us at the time of the prior appeal, and
analyzed retail rate revenue less operating expenses, as guidance
to the trial court on how to approach the issues on remand.
Significantly, we directed the court “to determine whether the tax
increased under the 2013 rates” because the “trial court [had not

                                 30
yet] determine[d] from the conflicting evidence about revenues
and costs employed in the rate setting process whether the excess
amount of the charge was increased in the 2013 rates from the
amount of the charge under the 2006 rates.” We did not make
findings of fact that constrained the trial court’s consideration of
the evidence necessary to answer the questions posed on remand;
the trial court was not bound to follow our guidance with a blind
eye to the facts it developed, or to the application of the law to the
facts.8
       The California Constitution does not limit the tax exception
set forth in article XIII C, section 1, subdivision (e)(2) to
operating expenses. It states that a tax does not include a
“charge imposed for a specific government service or product
provided directly to the payor that is not provided to those not
charged, and which does not exceed the reasonable costs to the
local government of providing the service or product.” (Cal.
Const., art. XIII C, § 1, subd. (e)(2), italics added.)

      8  Notably, neither party contests that the trial court
correctly calculated the tax set in 2006 as 9.42 percent, although
the trial court’s calculations were based on expense and revenue
categories additional to those used by this court. Specifically, in
the section of Saavedra I where we provided guidance, we
calculated the 2006 tax by comparing the base rate revenue to
the base rate expenses minus the GFT charge, and concluded
that the tax rate was 13.66 percent of projected retail rate
revenues. However, as the trial court correctly observed, both
FAC revenues and FAC expenses were identified as part of the
retail rate structure in the 2006 Staff Report, and were properly
categorized as retail revenue and reasonable costs of providing
service, respectively.

                                 31
       Additionally, Redding, supra, 6 Cal.5th at page 16, did not
suggest that the correct formula to determine whether ratepayers
were taxed is operating revenue minus operating expenses, but
rather the charge to ratepayers minus the reasonable costs of
providing service. “So long as the amount charged by a local
government for a service does not exceed the reasonable costs of
providing it, the charge is not a tax.” (Id. at p. 14.) There, the
plaintiffs could not make the minimal showing that retail rates
covered operating costs, which were an uncontested cost of
service. It was not necessary for the Supreme Court to determine
whether contested costs, such as the annual transfer, were
reasonable costs of providing service. (Id. at p. 18, fn. 14.)
Regardless, Redding did not confine reasonable costs to expenses
labeled “operating expenses.” The Redding court stated: “The
reasonable costs include expenditures to generate and acquire
electricity and other costs typical of utility operations. (Hansen v.
City of San Buenaventura[, supra,] 42 Cal.3d [at p.] 1181; see also
[Howard Jarvis Taxpayers Assn. v. City of] Roseville, supra,
97 Cal.App.4th at pp. 647–648 [‘what it costs to provide such
services includes all the required costs . . . , short-term and long-
term, including operation, maintenance, financial, and capital
expenditures’].)” (Redding, at pp. 15–16.)
       There is simply no basis for concluding that reasonable
costs of providing services as calculated in 2013 should be limited
to what the City had denominated as “operating expenses.”

                                 32
     The Utility Is Entitled to Recoup All Reasonable
Costs of Providing Service

       Preliminarily, we note that the Union did not dispute
before the trial court that either reserves or nonoperating
expenses were costs of providing electrical service. With respect
to nonoperating expenses, the trial court noted that although the
City argued that nonoperating costs are costs of providing
electrical service, neither the Union nor the court disputed this
point. The trial court attributed the City’s argument to the
court’s own imprecise use of the words “non-operating revenues”
when referring to wholesale revenues. Nonoperating expenses,
which the trial court identified as including, but not limited to,
power management, distribution, depreciation, and debt, were
reasonable costs of providing service. The Union has forfeited
any challenges to the trial court’s determination of the nature of
these expenses on appeal.
       On remand, the Union argued that revenues and
nonoperating expenses should not be included in the calculation
of the reasonable costs of providing service because the costs were
not included in the 2006 Staff Report. It reiterates this argument
on appeal.
       With respect to reserves, this does not appear to be an
accurate assessment of the 2006 Staff Report, which stated: “The
base rate is designed to recover the direct and indirect costs of
providing the infrastructure to serve local customers. Such costs
include, but are not limited to, the costs associated with
transmission and distribution, customer service, and
administration. The base rate should also include a reasonable
rate of return on investments to effectuate the transfer to the

                                33
City’s General Fund, and to establish sufficient reserves for
ongoing capital improvement projects that ensure the reliability
and integrity of the system infrastructure and upgrade the
generation assets to improve the cost structure and
competitiveness of the energy resources.” (Italics added.) The
2006 Staff Report clearly contemplated reserves as a component
of the base rate. Even if we were to accept the Union’s argument,
reserves would enter into our calculations.
       With respect to both expenses, we agree with the trial court
that there is no requirement that costs be compared one-to-one.9
The Utility is permitted to recoup the full reasonable costs of
providing service under Redding, supra, 6 Cal.5th at page 18
(“Article XIII C does not compel a local government utility to use
other nonrate revenues to lower its customers’ rates”). We
reiterated this holding in Saavedra I.10 Ignoring legitimate costs
of providing service in 2013 simply because those same costs were

      9 The city council reviewed the 2006 Staff Report and the
Rate Study, which was based in part on numbers drawn from the
Pro Forma. Neither party contests that these are the three
documents from which costs may be derived. (See, e.g., Santa
Clarita Organization for Planning & Environment v. Castaic
Lake Water Agency (2016) 1 Cal.App.5th 1084, 1103 [“Judicial
review of quasi-legislative agency actions is generally confined to
the record that was before the agency”].)
      10  The Union observes that if the entire amount in excess of
other reasonable costs of providing service is deemed to be
permitted as reserves “there would be no limit to the amount a
utility can charge its ratepayers, upending the very purpose of
Prop 26.” This argument ignores that the amount charged to
recoup reserves must be reasonable. The Union did not challenge
the reasonableness of the rates charged to replenish reserves.

                                34
not expressly identified in the 2006 Staff Report would flout this
rule. The trial court did not err by including all reasonable costs
of providing services in its calculations.

                          DISPOSITION

      We affirm the trial court’s judgment. The City of Glendale
is awarded its costs on appeal.
      NOT TO BE PUBLISHED.

                                           MOOR, J.

We concur:

             RUBIN, P. J.

             KIM, J.

                                35