Cities Challenge to IOUs’ Illicit Use of Carbon Credits Hits Roadblock

Pacific Gas & Electric and Southern California Edison face lawsuits from groups of cities alleging they diverted hundreds of millions of dollars of greenhouse gas credits to illegally lower the amount of municipal utility tax revenue owed. San Diego Gas & Electric could be next. But the suits, filed by more than 50 cities, were weakened when an appellate court affirmed that they could not require the utilities to collect the shorted funds but instead the cities must recover them from individual ratepayers.

The road ahead now is unclear for many cities.

Utility user taxes are a significant revenue source for many municipalities. The tax ordinances leave it to utilities and other service providers to calculate, collect and remit funds to the respective city treasuries in their territories.

Cities claim the investor-owned utilities have been manipulating state-funded customer assistance credits meant to mitigate rate pressure driven by IOUs’ required purchase of emission allowances under the state carbon cap-and-trade program. Instead, the utilities have used it to lower the amount of utility user taxes paid.

The CPUC established separate credit protocols for industrial, residential and small commercial customers.

“SCE is a pass-through entity as it relates to utility user taxes imposed by and collected on behalf of local municipal entities [and] will continue to ensure that climate credits are distributed to customers in a fair and equitable manner,” utility spokesperson David Song told Current.

In 2016, Torrance discovered SCE was calculating the tax based on the value of energy consumption after applying the credit, not before. Industrial customers get huge breaks, costing cities substantial sums. For Torrance, with four oil refineries and other big users, the scheme cost it millions in tax revenue. The difference is only a few dollars a year, however, for individual residential and small commercial customers.

“Edison has refused to correct its error and benefits from it,” according to a June 2020 lawsuit filed by 38 cities in SCE’s territory. “It collects millions of dollars from the CPUC to cover the credits, sells its power at full rates, but diverts tens of millions of dollars annually from the treasuries of the cities. This scheme costs Edison nothing and allows it to reward its largest customers and to subsidize the price of its service, encouraging more power use in a state trying to conserve.”

A month later, a similar suit was filed by 16 cities and one county against PG&E.

A Los Angeles Superior Court ruled that Edison’s approach to calculating the tax complied with the city’s ordinance and dismissed the complaint. An appeal court reversed that decision on March 17, 2021, but upheld the lower court’s finding that as a matter of law, it could not order Edison to refund the money it did not collect. Instead, cities would have to sue individual ratepayers.

That’s only viable for plaintiffs who can confine legal action to large customers.

Torrance has already settled with an Exxon refinery for nearly a half-million dollars. But it is not realistic for cities without large customers to sue for what amounts to only a few dollars a year per customer, even if the total, with interest and penalties, is a significant sum. The attorney handling the cases, Michael Colantuono, has conceded as much.

“It’s not going to be practical or perhaps politically wise to go chase small amounts from every electricity user,” Colantuono told the Daily Breeze. “You don’t go chase $25 with a lawyer.”

On hold

The cases are on hold pending an uncertain appeal.

Despite the appellate court ruling, Colantuono filed an amended complaint on behalf of Torrance asking the superior court to “order Edison to pay restitution of the electricity tax revenues the city has lost to date.” Attorneys would not discuss the case, but it appears to rely on a unique provision in Torrance’s utility tax ordinance to persuade the court the city is still entitled to recover the missing funds from Edison.

But not all the municipal plaintiffs have like provisions, and some have already dropped out of the case.

Two of the plaintiffs have made affirmative decisions to entirely forego recovery of the uncollected revenue to date and focus instead on preventing further under-collections, though it remains unclear when or how that can be achieved.

The city of South Pasadena, for example, approved a resolution on Nov. 3 saying it will forego recovery of the estimated $55,000 in annual under-collection it suffered for five years. City Attorney Andrew Jared said the city council wants to make it “crystal clear to residents that there was not going to be some other backhanded way of seeking the reimbursement” and to stem any “rumor, innuendo or speculation” that the city would sue residents.