July 16, 2012 Dave Battaglia Gibson, Dunn & Crutcher LLP Los Angeles, California

1. Deterring Municipalities from Imposing Additional “Fees” or Altering Specified Franchise RightsAmerican Gas Association Legal Forum 2012 July 16, 2012 Dave BattagliaGibson, Dunn & Crutcher LLP Los Angeles, California

2. “Invention is continually exercised,to furnish new pretenses for revenue and taxation.” – Thomas Paine, Rights of Man(1791)

3. The Problem: • Difficult economic times, and cities and counties are hurting financially • Dwindling state funds • Decreasing tax revenues • Perception that it is politically fatal to increase taxes

4. The Municipal Solution? • Try to increase monies paid by Utilities/LDCs (and others) • Purpose is to increase general revenue • Purpose may be hidden behind specific excuses and “namesmanship” • Utilities/LDCs seen as easy targets

5. The Utility/LDC Response: • Constitutional protections exist for Utilities against the imposition of these new exactions • Can be used to persuade a municipality to exempt Utilities • Can be used in litigation to prevent enforcement of these fees

6. The Utility/LDC Response:(Cont’d.) • Needs prompt attention: Waiting may waive rights to challenge • A New Fee • An Increase In An Existing Fee

7. Constitutional Challenges • Contracts Clause • Substantive Due Process Clause • Equal Protection Clause • Takings Clause • State Prohibitions Against Increasing Taxes

8. Two Examples • Southern California Gas Co. v. City of Alhambra (2011) • Southern California Gas Co. v. City of Santa Ana (2003)

9. Facts in Southern California Gas Co. v. City of Alhambra • Gas Co. had standard Franchise Agreement with City • Agreement provided for rights to install and maintain the gas system in the streets • In exchange for 2% gross revenues • “Installing” and “Maintaining” necessarily involves use of the streets • Subject to subsequent municipal ordinances

10. City’s New Ordinance • New “Encroachment Fee” imposed of $1,000 each project plus $2 per square foot • New “Permit Approval Fee” imposed of $1,500 each project • New “Inspection Fee” imposed of $100 per day • City Refused To Exempt Gas Co.

11. City’s Arguments • City Claims It Can Enact New Fees, Because: • It Has The “Police Power” To Do So And The Franchise Was Subject to Subsequent Ordinances • It Has Imposed Permit and Other Fees In The Past In Small Amounts

12. Federal Lawsuit Challenges Alhambra Ordinance • Contracts Clause: Substantial Impairment of Franchise Rights To Enter Into City Streets • Due Process Clause: No Reasonable Relationship Between New Fees and the Benefit Enjoyed By or Burden Imposed By Gas Co. • Equal Protection Clause: Non-Utility Companies Pay Lower Amounts • Takings Clause: Taking Monies Despite Pre-Existing Rights

13. Results in Southern California Gas Co. v. Alhambra • Federal Court Grants Summary Judgment for Gas Co. • New Exactions Struck Down As To Gas Co. And Injunction Issued • $250,000 In Attorneys’ Fees Awarded To Gas Co. • Civil Rights Violation

14. Key Points of Decision • Violates Contracts Clause to impose new fees for existing rights in the Franchise • Substantial Impairment of Contract exists when financial term altered • New Fees also not are not “reasonable or necessary"

15. Key Points of Decision(Cont’d.) • “Police Power” Rationale Rejected: City may not unilaterally alter material terms of its own contract • “Past Payment” Rationale Rejected: Just because Gas Co. paid small fees in the past does not mean the course of conduct justifies additional exactions regardless of nature or purpose

16. Facts in Southern California Gas Co. v. City of Santa Ana • Franchise Agreement includes rights of Gas Co. to repair City streets after excavation • City passes New Ordinance imposing New “Trench Cut” Fees for each excavation in City streets • Alleged basis for new fee was to compensate for harm caused to the streets

17. Results in Southern California Gas Co. v. Santa Ana • Federal Court declared City’s fee unconstitutional under Contracts Clause • Cannot impose fee for repair when Gas Co. has right to repair first • Gas Co. already pays franchise fee for rights to excavate in City streets • “Police Power” Rationale rejected • $75,000 in Attorneys’ Fees awarded to Gas Co.

18. Other Constitutional Provisions: Substantive Due Process • Fee Is Arbitrary and Unreasonable • Fee imposed bears no reasonable relationship to true costs (repaving, processing permits, inspecting repairs, etc.). • Utility is funding benefits or burdens of others such as its general fund

19. Other Constitutional Provisions: Substantive Due Process - (Cont’d.) • Fact intensive inquiry likely requiring significant discovery as to how the fee is calculated • Example: Fee imposed on water rights holders based on the need to replace a reduction in the general fund and not based on benefits/burdens

20. Other Constitutional Provisions: Equal Protection And Takings Clauses • Equal Protection: Utilities treated differently than others similarly situated • Example: Street fees paid by others (such as individuals or developers) are less • Example: One-third of water rights holders pay fee for others and public generally • Takings Clause: Likely derivative of other claims, but underscores scope of impropriety

21. Other Constitutional Provisions: State Tax Provisions • Namesmanship” is designed to obscure true nature of the exaction • Propositions 13 and 218 in California; Similar provisions in other States • “Fee” becomes a “tax” if it is levied for unrelated revenue purposes • Such as expressly to fill a gap in a budget deficit

22. Other Constitutional Provisions: State Tax Provisions - (Cont’d.) • “Fee” becomes a “tax” when the nexus is lacking between the amount of the fee and the value of the service. • Example: Fire protection “fees” for $105 million levied based not on need, but by dividing revenue needed by acres affected

23. Final Lessons • There is no reason for these disputes to end up in court. Case law can be used to try to obtain exemptions for utilities. • Threat of the City having to pay attorneys’ fees both to defend a lawsuit and to the Utility afterwards is significant leverage. • But Constitutional options exist if litigation becomes necessary. • Don’t delay.

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