Palo Alto utility gas overcharges are illegal, judge says -- but there are other questionable charges at City Hall | An Alternative View | Diana Diamond | Almanac Online |

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About this blog: So much is right — and wrong — about what is happening in Palo Alto. In this blog I want to discuss all that with you. I know many residents care about this town, and I want to explore our collective interests to help ...  (More)

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Palo Alto utility gas overcharges are illegal, judge says -- but there are other questionable charges at City Hall

Uploaded: Dec 8, 2020
Palo Alto resident Miriam Green got her monthly utility bill, and realized how much of the money the Utilities Department gets from customer gas, electric and water usage is transferred to the city's general fund. She filed a lawsuit complaining about this practice, and four years later, she won! As a result, the Santa Clara Superior Court ordered the city to pay utility gas customers (that's us!) more than a $12 million refund.

Hooray for the persistence of this woman.

Miriam Green, a downtown Palo Alto resident, charged in her lawsuit that the Utilities Department annually transfers to the city's general fund a certain portion of its revenue from customers, and that practice, which has been going on for years, amounts to an illegal tax. The court agreed.

In recent years the transfer funds have been increasing and are now around the $20 million level, all of which goes into the general fund, which was $239 million before the COVID 19 hit the business community.

I asked several years ago about this transfer and was told that it started 100 years ago, just after the city's founding. But this transfer has bothered me for several years. Excess utility revenues from customer charges go into the fund to pay for services -- and higher employee salaries. Why should my utility bill payments go for anything but how much gas, water and electricity I actually use?

The concept that created this is an interesting one. Early city fathers decided that Palo Alto should have its own utility department and not rely on PG&E (or whatever utility company provided services in the 1900s). Once created, the council, at the advice of an attorney, at some point said it should get a "finder's fee" for its investment, and thus is entitled for some yearly funds from this investment, a practice in the private business community, but not for cities.

Nevertheless, the annual transfer from the Utilities Department to the city began.

Let's look at this. Palo Alto starts its own Utilities Department, bearing the Palo Alto name and under city manager control, and then demands money from the very same utilities department it started that shared the same city hall space as the city staff. Hmmm.

But wait, there's more!

In the early 1990s, when Frank Benest was city manager, Stanford was letting Palo Alto lease some of its land for $1 a year -- as a gesture of friendship. The city paid the $1 per large parcel. (This practice may have been in existence earlier; I learned about it when Benest was there.) Most of this land was used by the city for outdoor electrical equipment and transmission.

But the Utilities Department was growing, and the city manager and others decided to charge this department at City Hall for usage of their space -- rent of about $600,000/year, as I recall. Nice return on a $1 expenditure, I would say. A few other city departments also were charged for rental for their offices, but not as much. City Hall is city-owned. And the market rental rate is high these days for downtown commercial space, so it's expensive to rent space at City Hall.

In recent months I was wondering why these charges exist when all the rent collected goes into the city's general fund.

I am guessing because guess who is paying the rent? We, the residents. For utilities, it comes from the monthly utilities bills we have to pay. For the Planning Department, it comes from all the fees developers and homebuilders have to pay, as well as permits. For the Fire Department -- well, I know it's costly to use an ambulance these days (and that's just minor example), but there are the property taxes we pay the city, and the city gets a portion of the sales tax we pay if we buy locally.

The Miriam Green v. City of Palo Alto lawsuit points out that the fact that the Utilities Department transfers money to the city is evidence that rates being charged to utilities customers were higher than needed

And that's partly why the lawsuit was a success. A city fee may be considered a tax if the city charges more than needed to cover reasonable costs for a service, according to the judge's analysis.

An illegal tax on residential utilities customers exists because "the charge imposed on them for service includes surplus capital raised by the department that is transferred to the City, resulting in electric and natural gas charges that are not, and cannot be justified," attorneys Gene J. Stonebarger and Richard D. Lambert of the firm Stonebarger Law wrote in the complaint against the city.

Under state laws, voters must approve a tax, which has not occurred with the utilities rates and increases.

Inherent in all these charges the city imposes is an underlying philosophy (desire? strategy?) to get residents to pay more to the city and cover all overruns.

How about taxing the business community more? We've heard that refrain for years, and even a city ballot measure asking for a business tax was tried, but failed, thanks to residents and businesses that opposed that.

But that's a column for another day.

In the meantime, I am grateful to Miriam Green for filing this lawsuit, and while I've never met her, I appreciate her efforts very much.

(The city council is meeting Dec. 14 in closed session to discuss this issue. I don't know how or when residents will get the $12 million in overpayments they made to the city, during the 2015 to 2019 span.)
What is it worth to you?


Posted by mjh, a resident of College Terrace,
on Dec 8, 2020 at 2:46 pm

mjh is a registered user.

A cash cow for city hall.

Posted by Online Name, a resident of Embarcadero Oaks/Leland,
on Dec 8, 2020 at 10:42 pm

Online Name is a registered user.

Good for her!

This year the city's run a surplus of $34,000,000, up from its usual $20,000,000 , with "much of that" attributed the PA Utilities. Any idea what the exact number is for this year and how big a rebate we can expect with all the rate increases we've seen since the lawsuit was originally filed?

Posted by DIana Diamond, a resident of Midtown,
on Dec 9, 2020 at 9:08 am

DIana Diamond is a registered user.

Online name --

Good point on the extra surplus! The amount of the rebate to residents and when it will happen still has not been decided, nor has there been any discussion on whether the rebate will be distributed in one lump sum to residents -- or piecemeal.. I hope it's one lump sum, other wise residents who move from the city may be lost in the system and lose their rebate.

Posted by Online Name, a resident of Embarcadero Oaks/Leland,
on Dec 9, 2020 at 10:59 am

Online Name is a registered user.

Also, why is it just limited to gas when our water bills are so outrageous?

PG&E, which supplies PA's electricity, is getting another 8% rate hike to cover its "fire prevention costs" so we'll be hit with that too as PAU moves to force everyone away from cheaper natural gas while subjecting us to more frequent blackouts.

Thanks for your column and please, please keep us apprised.

Posted by mjh, a resident of College Terrace,
on Dec 9, 2020 at 3:38 pm

mjh is a registered user.

The beginning of these substantial annual transfers from utilities to the city general fund started after the 2000 economic downturn. At that time, to smooth over the impact on the city budget, one of the then council members suggested a substantial transfer from the utilities reserve fund to the city's general fund.

One of the benefits of living in Palo Alto used to be having our own utilities set up as a non-profit entity separate from the city and the city budget. Now a "hidden tax" is baked into our constantly jacked up utility rates to fund an ever increasing transfer of funds from our utility bills to the city, to the tune of $20 million plus, increasing year on year.

Unfortunately, over the years our city managers and councils have become accustomed to this "hidden tax" as a source of revenue and set the city's budgets accordingly.

Posted by Sherry Listgarten, a resident of Greenmeadow,
on Dec 11, 2020 at 1:45 pm

Sherry Listgarten is a registered user.

Diana, this is so interesting, thanks for reporting on it! I hope our City will create much more clarity between utility finances and the general fund. It's hard enough to operate a utility without having a built-in money sink. I'm curious what the UAC has to say about this -- did you ask?

Posted by jc, a resident of College Terrace,
on Dec 11, 2020 at 3:02 pm

jc is a registered user.

Generating revenue for the general fund has been at the behest of the council and UAC is complicit. Policy since the 2000 economic downturn adversely impacted the city budget and the then council looked at the Utilities reserve fund for an injection of cash into the city's general fund. This annual transfer has been on an upward trajectory ever since.

Posted by Rebecca Eisenberg, a resident of Old Palo Alto,
on Dec 14, 2020 at 4:59 pm

Rebecca Eisenberg is a registered user.

Diana, A business tax has not been "tried" for MANY years (unless I missed something?).

There was going to be a business tax on the ballot, but the CITY COUNCIL, including the candidates you endorsed, took it off the ballot!

The business tax I support would not tax small businesses, only large businesses, and in fact it would create a fund for small businesses, so of course the small business community would support it.

And as to the large businesses, in every other city that put a large business tax on the ballot, the large businesses, even when directly targeted by the business tax, including in East Palo Alto and Google in Mountain View, did NOT oppose the large business tax. That is because Google and BENEFIT from the infrastructure improvements and housing paid for with the large business taxes!

The ONLY people who opposed a business tax is our City Council -- including, again, the members you endorsed.

So this is what you wanted, ... or is it?

Posted by Online Name, a resident of Embarcadero Oaks/Leland,
on Dec 15, 2020 at 9:09 am

Online Name is a registered user.

I'd love to know when we're getting our refunds and why these "surcharges" aren't getting more attention.

Posted by Diana Diamond, a Almanac Online blogger,
on Dec 15, 2020 at 3:55 pm

Diana Diamond is a registered user.

This transfer tax started in the early 10900s, not 2000. And the business tax has been before the city council several times in the last 15 years, and , for the most part, the council wanted the tax.

This is from the Weekly written in 2018 by Gennady Sheyner:
For more than a century, Palo Alto's municipal utilities have served the city as both a provider of critical services and a revenue-generating asset from which the city can transfer money to pay for basic services like public safety, libraries and park maintenance.

The annual transfer has gradually swelled since 1909, when the council shifted $22,755 from the water, electric and gas funds. It crossed the $1-million threshold in 1961 and the $10-million mark in 1995. The current budget includes $20.8 million in transfers from the various utility funds, $700,000 more than in the prior year.

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