Reported / Citable
Background
San Diego Gas & Electric Company (SDG&E) has served as San Diego’s gas and electricity provider under franchise agreements with the City since 1920. When the most recent 50-year franchise expired in 2020, the City issued open invitations to bid for replacement agreements. SDG&E was the only bidder in both rounds. After the mayor rejected SDG&E’s first-round bid as nonresponsive, the City reissued invitations, negotiated new terms, and in May 2021 the City Council adopted ordinances awarding SDG&E 20-year gas and electric franchises.
The Protect Our Communities Foundation (POCF), a nonprofit representing San Diego ratepayers before the California Public Utilities Commission and the courts, filed a writ petition challenging the franchise awards on three fronts: (1) the invitation-to-bid process violated the San Diego City Charter’s competitive bidding requirements; (2) four surcharges embedded in the franchise ordinances — including a 3% gross receipts surcharge, customer gas and electric surcharges, and an undergrounding surcharge of 3.53% — were unauthorized “taxes” under Proposition 26 that required voter approval; and (3) the franchise award was a CEQA “project” requiring environmental review before adoption.
The trial court rejected all of POCF’s claims but severed a provision in the franchise ordinances requiring a two-thirds City Council vote to terminate the franchises before their term ended, holding the City Charter mandated only a bare majority. All parties appealed.
The Court’s Holding
The Fourth District Court of Appeal, Division One, certified for partial publication, affirmed the trial court on all rulings. On competitive bidding, the court found POCF failed to prove a Charter violation. The City Charter requires an open competitive process — invitations issued publicly so that any qualified bidder may respond — but does not guarantee that multiple parties will actually bid. The mayor’s cancellation of the first-round bids as nonresponsive was authorized, and the reissued invitations satisfied the Charter’s procedural requirements even though SDG&E was again the only bidder.
On Proposition 26, the court found all four challenged surcharges fell within one or more constitutional exemptions to the definition of “tax.” Proposition 26, adopted by California voters in 2010, broadly defines “tax” as any levy, charge, or exaction imposed by a local government — but includes seven enumerated exemptions. The court concluded the franchise surcharges were either (a) charges imposed as a condition of the City’s permission for SDG&E to use public rights-of-way, representing fair market compensation for that use, or (b) regulatory charges tied to the costs of administering the franchise, rather than general revenue measures requiring voter approval.
On CEQA, the court concluded independently of the trial court that the franchise ordinances did not constitute a CEQA “project” at all. Under Union of Medical Marijuana Patients, Inc. v. City of San Diego (2019) 7 Cal.5th 1171, a CEQA project must involve an activity that may cause a direct or reasonably foreseeable indirect physical change in the environment. Awarding a franchise for continued utility services using existing infrastructure — with no commitment to any specific new construction — was a fiscal and administrative governmental activity, not a project. Because no environmental review was triggered, the court did not reach the question of whether categorical exemptions would have applied. On cross-appeal, the court struck the two-thirds supermajority termination clause, holding the Charter’s ordinary majority rule governs.
Key Takeaways
- Franchise renewals are not CEQA projects where the award authorizes continued use of existing infrastructure without committing to any specific new construction or physical environmental change.
- Proposition 26 exemptions protect franchise surcharges that represent fair compensation for use of public rights-of-way or reasonable regulatory cost recovery — they are not “taxes” requiring voter approval.
- Competitive bidding mandates require open process, not competitive results: A municipality satisfies its Charter requirements by issuing genuine public invitations even if only one qualified bidder responds.
- Supermajority requirements in franchise agreements that conflict with a city charter’s default majority rule will be struck — municipalities cannot contractually override their own governance documents.
- Template for utility franchise renewals: This decision provides a practical framework for California cities and utilities navigating the legal challenges that increasingly accompany franchise renewals, particularly from ratepayer groups and environmental advocates.
Why It Matters
Dozens of California cities and counties are in various stages of renegotiating utility franchise agreements — many entered decades ago — as existing terms expire. These renewals often face coordinated challenges from ratepayer advocates and environmental groups on CEQA, tax, and competitive bidding grounds. This decision clarifies that the mere award of a franchise for continued utility service is not a CEQA-triggering event, a significant win for cities that want to renew service arrangements without embarking on a full environmental review of existing operations.
For energy law practitioners, this case also provides useful guidance on the outer boundaries of Proposition 26: franchise surcharges tied to rights-of-way use or service regulation are not “taxes” that require voter approval, even under Proposition 26’s expansive definition. And for municipal attorneys, the court’s ruling on the supermajority clause is a reminder to audit franchise ordinances for provisions that may exceed a city’s charter authority — provisions that look like extra protection for the utility may actually be unenforceable if they conflict with the charter’s governance rules.