A California city’s electric utility rate did not need voter approval. The rate did not exceed the reasonable costs of providing electric service.California Constitution on New TaxesThe utility rate was not a tax under the Constitution. The California Constitution requires voter approval in order for local governments to impose, increase or extend a tax. However, a charge imposed for a service is not a tax if it does not exceed the reasonable costs of providing the service.Costs Covered by the RateThe taxpayers claimed that the city embedded in its rate a charge to compensate for services provided by other departments. Other city departments provided services to the utility like police and fire protection, billing, finance, and fleet maintenance. To cover this cost, the city made an annual transfer from the utility’s enterprise fund to the city’s general fund.This transfer was also known as a “payment in lieu of taxes” (PILOT). The transfer equaled the amount a private utility would pay in property taxes. When the city raised its electric utility rate, it characterized the PILOT as an operational expense. The taxpayers argued that the rate increase required voter approval because it covered the PILOT.Rate Did Not Exceed CostsBut the utility’s projected rate revenues were less than its costs of providing electric service even without the PILOT. Further, California law did not require the city to subsidize the utility’s rates with non-rate revenues.All rate revenues went towards covering the utility’s uncontested operating costs. Other non-rate revenues covered the remaining shortfall and the PILOT.Citizens for Fair REU Rates v. City of Redding, California Supreme Court, No. S224779, August 27, 2018, ¶406-821Login to read more tax news on CCH® AnswerConnect or CCH® Intelliconnect®.Not a subscriber? Sign up for a free trial or contact us for a representative.