II. Municipalities' Rights to Franchise Fees and Municipal Surcharges

A. Positions of Parties

DWR asserts that it is not responsible for the collection or remittance to municipalities of franchise fees relating to electric power sales that it makes under AB1X. DWR did not include any provision for franchise fees in its revenue requirement implemented in D.02-02-052. Although DWR-provided power flows over IOU facilities that are subject to the franchise authority of municipalities, DWR, itself, does not own physical facilities in public rights-of-way. DWR has no franchise agreement with any municipality nor does it operate a franchise.² The emergency legislation establishing the DWR's responsibilities for buying and selling power identifies the categories of charges the DWR is to collect, but does not include municipal surcharges or franchise fees.³ Since the state legislature has carefully delimited the fees and expenses that the DWR may collect, DWR argues that municipal charters may not expand the DWR's statutory role to include remittance of franchise fees.

DWR recommends that the IOUs continue to collect surcharges and remit franchise fees to municipalities on revenues from sales of DWR power in accordance with the IOUs' franchise fee agreements, subject to an appropriate cost recovery mechanism for these payments.

The IOUs argue that they have no legal obligation to remit franchise fees on DWR-supplied power. Under the provisions of Public Utilities Code Section 6006, franchise fees are calculated based upon the "gross annual receipts of the grantee arising from the use, operation, or possession of the franchise." Since the "grantee" of the franchise is the IOU, they argue, only the "gross annual receipts" from IOU sales are subject to franchise fees. The IOUs exclude those revenues that are not sources of IOU earnings for franchise fee purposes. Such excluded revenues include interdepartmental sales and collections from others, e.g., users taxes.

The IOUs argue that they are not obligated to remit franchise fees for DWR-provided power under the terms of their franchise agreements, because the DWR-provided power is not the property of the IOU. Under Water Code Section 80110, DWR retains title to power that it sells to end users. The IOUs thus view the "gross revenues" from DWR sales as belonging to DWR, whereas franchise fees referenced in Public Utilities Code Sections 6000 through 6302 apply solely to the revenues belonging to the IOU. Thus, they argue, revenue from the sale of power by DWR is not "receipts of the grantee" that the IOUs include for computing franchise fees pursuant to Section 6006.

While contending they are not responsible for franchise fees on DWR revenues under Sections 6000-6302, SDG&E and SCE do believe that local governments are entitled to "municipal surcharges" on DWR revenues as prescribed by Public Utilities Code Sections 6352 through 6354.1. These sections codify provisions of the Municipal Lands Surcharge Act ("the Act") which was created in 1993 by Senate Bill (SB) 278 which imposed a surcharge on gas and electric sales by entities other than the incumbent utility.⁴

The statutory provisions authorizing municipal surcharges were enacted in response to changes in California gas and electricity industries as they began to be partially deregulated, permitting entities other than the IOUs to sell to retail customers. Because then-existing statutory requirements for remittance of franchise fees only applied to revenue from sales of electricity by IOUs, non-utility commodity sales would result in reduced IOU revenues and, consequently, reduced franchise fees paid by IOUs to municipalities. The Legislature recognized that reducing franchise revenues simply because the commodity was supplied by an entity other than the franchised IOU would be unfair both to municipalities and customers.

SDG&E and SCE believe that, consistent with the intent of SB 278, customers obtaining power from DWR have a separate obligation under Section 6352 through 6354.1 of the Code to pay such "municipal surcharges" to local governments. Likewise, SDG&E and SCE believe that the IOUs have an obligation to bill, collect, and remit such municipal surcharges. SDG&E believes that end-use customers receiving DWR energy are responsible for municipal surcharge payments.

PG&E disagrees with SCE and SDG&E on this point. PG&E argues that under current law, neither utility franchise fees nor municipal surcharge fees are payable to cities and counties on the power delivered by DWR. PG&E does not believe that current franchise fee and municipal surcharge statutes adequately address how cities and counties should be compensated related to DWR power sales. Under the statutory scheme, "energy transporters" are responsible for collecting the surcharges and remitting fees. PG&E argues that under the Act, DWR serves the role of such an energy transporter in similar fashion to electric service providers (ESPs).⁵ Yet, the statute defines a "transportation customer" as an entity other than "the State of California or a political subdivision thereof." Therefore, PG&E believes the unintended consequence of AB1X is to exempt DWR, as an agency of the State of California, from the municipal surcharge.

DWR claims that it is not an "energy transporter" as defined by Public Utilities Code Section 6351, and thus is not required or authorized to collect surcharges or remit franchise fees to municipalities under that statutory provision. DWR argues that Public Utilities Code Sections 6353 and 6354 require the energy transporter (i.e., the IOU) and not the seller (i.e., DWR) to calculate, collect, and remit municipal surcharges. DWR does not consider itself responsible for collecting municipal surcharges pursuant to the California Public Utilities Code Section 6350 et seq.

Parties representing municipalities argue that they are entitled to compensation on DWR power sales, and that the Commission should order DWR or the IOUs to remit appropriate fees. The Cities generally contend that both the IOUs and DWR are jointly liable for the payment of franchise fees on DWR power sales. The Cities argue that under an "implied covenant of good faith and fair dealing," the IOUs must honor their obligations to the municipalities, including the payment of franchise fees. Because DWR stands in the shoes of the IOUs for purposes of purchasing power, the cities claim, the IOUs should be obligated to collect franchise fees on this power and provide such fees in full to the municipalities. The municipalities claim the Commission has sufficient discretion to require remittance of franchise fees on power supplied by DWR for utility customers without additional legislation or "clarification."

City of San Diego argues that under city charters, franchise fee obligations are not confined to revenue from transmission and distribution, but also include revenue from generation sold to users. The City argues that the franchise fee obligation applies irrespective of whether the generation is supplied by the IOU, a third party, or DWR. The San Diego City Charter Section 103.1 states that no person may "establish and carry on any business within the said City which is designed to or does furnish services of a public utility nature" to the inhabitants of the City without consent of the City manifested by ordinance. The City argues that selling power is such a business even if DWR does not own the lines. Section 105 of the San Diego City Charter requires payment of franchise fees by persons furnishing such service.

Since both SDG&E and DWR are jointly involved in DWR's electric energy sales in the City, and because DWR could not sell its power without the participation of the utility, City of San Diego argues that they are jointly and severally liable for franchise fees on all revenue derived from the entirety of those sales. City of San Diego claims that while DWR is not obligated to charge franchise fees to its customers as a line item, it is legally obligated to pay a percentage of its gross revenue to the City as a franchise fee.

City of San Diego claims that the municipal surcharge was not intended to apply to DWR, but was designed instead solely for the direct access market to address the fact that unbundling would inadvertently put multiple service providers in a position of doing business with the cities, resulting in disparity in franchise fee burdens for customers and uncertainty for the cities. (See Stats.1993 ch 233 Section 1, effective July 30, 1993). City of San Diego claims the municipal surcharge was the legislature's expedient approach to addressing an inadvertently created problem, but does not recognize the constitutional basis of the charter cities' rights to franchise fees, and it does not replace those rights. Thus, the City claims it is not legally obliged to permanently accept municipal surcharges as a substitute for franchise fees.

Both the City of San Diego and CCSF claim that municipal surcharges only partially protect the cities' financial interest, and that franchise fee remittances on DWR sales should therefore be required. Otherwise, they believe the status quo should continue until a more permanent solution is adopted to avoid serious harm to the municipalities and claims of rate discrimination. The County of Los Angeles, however, expresses no objection to receiving municipal surcharges (in lieu of franchise fees) on DWR sales. Likewise, several mayors and city administrators throughout California (although they are not parties to this proceeding) sent letters to the ALJ in favor of municipal surcharges as an acceptable form of compensation for DWR power sales.

B. Discussion

The question before us is whether the rights of the municipalities to be compensated for the sale of electric power utilizing IOU facilities that are subject to a franchise agreement apply to sales by DWR made pursuant to AB1X.

1. Obligations to Pay "Franchise Fees"

Under the provisions of Code Section 6006, the relevant determinant of franchise fee liability depends upon whether the funds in question constitute "receipts" belonging to the IOU (i.e., the "grantee" of the franchise). Under the legal provisions of Water Code Section 80110, DWR retains legal title to all power sold by it to end use customers. Although the IOU acts as collection agent for DWR, the IOU never takes title to the power, and accordingly, is merely a temporary custodian of the receipts from the sale of DWR power.⁶ Thus, DWR revenues do not constitute "receipts" belonging to the IOU for purposes of computing franchise fees. If we were to treat DWR receipts as property of the IOU, we would be in violation of Water Code Section 80110.

Moreover, there is nothing in the Water Code that identifies either franchise fees or municipal surcharges as elements of the revenue requirement that DWR collects. Likewise, because DWR has responsibility to make the determination that its revenue requirement is "just and reasonable" under Public Utilities Code Section 451, we cannot compel DWR to collect such fees on its power sales, or to remit fees to municipalities.

DWR is not legally liable for remittance of franchise fees under those provisions of the Code that apply only to franchisees. DWR does not own facilities subject to a franchise or hold a franchise agreement with any municipality. The terms of DWR power sales are not defined by municipal charter, but by statewide emergency legislation. DWR procurement under AB1X is not subject to municipal charter authority.⁷ The emergency legislation under AB1X creating the DWR's power purchase responsibilities stated that the problems addressed by the legislation had a statewide impact. Although cities may legislate upon matters of statewide concern, in the event of conflict with state law, state law controls.⁸ Moreover, the courts have instructed that any doubt about whether a matter is a municipal affair or has broader state concern must be resolved in favor of the legislative authority of the state.⁹

The mere fact that the DWR sales are delivered utilizing facilities of the IOU that are subject to a franchise agreement does not, of itself, make DWR subject to remittance of franchise fees. Otherwise, if nonutility third-party sales were subject to franchise fees merely by virtue of being delivered over franchised facilities, there would have been no need for the California Legislature to enact statutory provisions establishing municipal surcharges for such sales pursuant to Code Sections 6360-6354.1. Yet, the Legislature expressly recognized that because third party sellers of electricity do not have franchise agreements with municipalities, their sales are not subject to franchise fees, and thus, an alternative funding source was needed to protect against loss of revenues by municipalities.

Accordingly, we conclude that the requirements for remittance of franchise fees under Code Sections 6000-6302 apply only to the revenues on sales made by the franchisee (i.e., the IOU) within the limits of the municipality for which the franchise is awarded. Because the power sold by DWR is not the property of the IOU, the revenues on the sale of DWR power likewise is not the property of the IOU franchisee. Thus, the IOU is not liable for remittance of a franchise fee on DWR sales pursuant to Code Sections 6000-6302.

2. Obligations to Pay "Municipal Surcharges"

We conclude, however, that the key to resolving the municipalities' concerns regarding compensation for DWR sales lies in the provisions of Public Utilities Code Sections 6350 through 6354.1. Although DWR power purchases under AB1X were not specifically contemplated at the time the municipal surcharge was enacted, the statute nonetheless required customers purchasing power from a third party to be liable for the municipal surcharge. We recognize that DWR's entry into the electric market under AB1X was intended to backstop the IOUs rather than to compete against them. Nonetheless, the end result still entailed the sale of electric power to end use customers by an entity other than the IOU. The stated legislative intent behind enactment of the municipal surcharge was to protect the financial integrity of local government as a portion of the traditional IOU revenue base for gas and electric service was opened up to the competitive market. Thus, whether the loss of IOU revenue was due to competition or due to DWR backstopping the IOU, the underlying legislative intent still is the same. Therefore, we conclude that DWR sales are a special category of third-party electricity sales that are subject to municipal surcharges under the provisions of Code Sections 6351 through 6354.1 which codified the Municipal Public Lands Use Surcharge Act.

The legislative intent of the Act was to keep municipalities financially whole in the changing regulatory environment of the 1990's, recognizing that customers receiving power over IOU facilities should not escape their obligation to pay franchise fees because the power was purchased by a non-utility seller. Those customers would have paid franchise fees on such power had it been purchased from the IOU. It would be inconsistent with the intent behind the municipal surcharge act to deprive municipalities of compensation for DWR sales merely by virtue of the fact that the IOUs rely upon DWR to provide a portion of the power that they previously supplied to their own customers.

Under the Act, the municipal surcharge is assessed on "transportation customers," and provided to cities and counties. In this regard, Section 6352 (a) states that "[n]otwithstanding any other provision of law, a transportation customer who receives transportation service on [an] electric transmission or distribution system . . . subject to a franchise agreement executed pursuant to this division from an energy transporter shall be subject to a surcharge as defined in Section 6353."

A "transportation customer" is defined under Section 6351(c) to include every person (other than certain state entities) purchasing electricity from a third party and transporting such electricity on an energy transporter's transmission or distribution system. The exclusion of political subdivisions of the state of California from the definition of "transportation customer" raises the question of whether DWR is a "transportation customer" and whether its sales are thereby exempt from the municipal surcharge. Although DWR is a political subdivision of the state of California, we conclude that DWR power sales revenues nonetheless give rise to surcharge revenues under the Act because it is the end use customer, not DWR who is considered as the "transportation customer" under Section 6351.

DWR is more properly designated as a third-party supplier (referred to in Section 6351(c)) from whom the retail customer purchases electricity. The IOU serves the role of "energy transporter," as defined under Section 6351(b), since its facilities are used to deliver DWR power. We conclude therefore that end use customers of DWR are "transportation customers" and are responsible for municipal surcharges on DWR power sales in that capacity. There is no reason to treat sales by DWR differently than sales through other third-party suppliers, where the IOU acts as a collection agent, collecting from transportation customers and paying the municipality a surcharge based on such third-party sales pursuant to Section 6350 et seq. The IOUs already have in place a process for collecting and remitting municipal surcharges relating to third-party revenues. It is appropriate, therefore, for the IOUs to bear responsibility for collecting and remitting municipal surcharges owed to the municipalities by customers of DWR, as well.

Parties representing municipalities provide no citation to support the claim that municipal surcharges only "partially" protect cities' financial interest in comparison to franchise fees. Section 6350 expressly states that the intent of the municipal surcharge is "to replace, but not increase, franchise fees that would have been collected pursuant to this division if not for changes in the regulatory environment such as the `unbundling' of the gas industry." Moreover, as prescribed in Section 6353(d), the municipal surcharge is calculated by applying the franchise fee percentage factor to revenues generated by transportation customers. Thus, as a replacement for franchise fees under Sections 6000-6302, we find no basis to conclude that receipt of municipal surcharges on DWR revenues would financially disadvantage the municipalities, as compared with franchise fees.

We therefore require the IOUs to continue to remit funds to the municipalities for DWR sales as prescribed in D.02-02-052, but clarify that such remittances are properly classified as municipal surcharges under the provisions of Code Sections 6352-6354.1, rather than "franchise fees" under Sections 6000-6302. To the extent there are administrative costs associated with having IOUs calculate, bill, collect and remit Municipal Surcharges, SCE states that such costs should not be significant and should be recoverable from DWR under the terms of SCE's Servicing Agreement with DWR. SCE does not see any impediments assuming that it is allowed to recover from its customers the municipal surcharges it remits on the DWR electric power.