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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By Diana Diamond

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.)