Constitutional Franchise In California

Constitutional franchises are derived from article XI, section 19 of the California Constitution of 1879 (hereafter, article XI, section 19). As amended in 1884, article XI, section 19 stated as follows: "In any city where there are no public works owned and controlled by the municipality, for supplying the same with water or artificial light, any individual, or any company duly incorporated for such purpose under and by authority of the laws of this State, shall, under the direction of the Superintendent of Streets, or other officer in control thereof, and under such general regulations as the municipality may prescribe for damages and indemnity for damages, have the privilege of using the public streets and thoroughfares thereof, and of laying down pipes and conduits therein, and connections therewith, so far as may be necessary for introducing into and supplying such city and its inhabitants either with gaslight or other illuminating light, or with fresh water for domestic and all other purposes, upon the condition that the municipal government shall have the right to regulate the charges thereof." This provision eliminated the system of governmental grants of franchises, which had led to favoritism and monopolies in derogation of free competition. (See Stockton Gas etc. Co. v. San Joaquin Co. (1905) 148 Cal. 313, 318 [83 P. 54]; Russell v. Sebastian (1914) 233 U.S. 195, 206 [34 S. Ct. 517, 520, 58 L. Ed. 912].) It allowed any person or company to supply water or artificial light to a city 3 without approval by legislative or municipal officers. All that was required for the grant to be effective was acceptance by the provider--that is, the actual installation of the pipes, conduits and poles necessary to perform the service. (Stockton Gas etc. Co. v. San Joaquin Co., supra, 148 Cal. 313, 318.) The franchise then constituted a valid contract with the state, which conferred upon the person or company a protected property right. (Russell v. Sebastian, supra, 233 U.S. at p. 204 [34 S. Ct. at p. 519].) On October 10, 1911, the Constitution was amended to eliminate the constitutional franchise, but the amendment did not impair the rights of any utility that had already undertaken to use the streets to supply light or water to a city. (Id. at p. 210 [34 S. Ct. at p. 522].) Thus, once acquired, no fee could thereafter be imposed for its continuous exercise to the extent that it was used to provide light or water. However, the same poles and wires that carried electricity for lighting supplied electricity for other uses such as heat and cooking. for these other purposes, holders of constitutional franchises entered into agreements with cities for "complementary" franchises, which required them to pay a fee for the privilege of using city streets to provide gas or electricity for uses other than light. On March 22, 1905, the Legislature enacted the Broughton Act, which established procedures for granting nonconstitutional franchises and devised a formula for computing complementary franchise fees based on receipts attributable to the use of the franchise. (Stats. 1905, ch. 578, pp. 777-780; see 6001 et seq.) According to this formula, a public entity could charge the utility 2 percent of the utility's gross annual receipts "arising from [the] use, operation, or possession" of the franchise. (Stats. 1905, ch. 578, 3, p. 779; see 6006.) The segregation of receipts for lighting, which required no payment, from other uses presented practical accounting problems in the application of the formula. (See Los Angeles County v. Southern Counties Gas Co. of Cal. (1954) 42 Cal. 2d 129, 132 [266 P.2d 27]; County of Tulare v. City of Dinuba, supra, 188 Cal. 664, 672.) In 1937 an alternative scheme took effect as the Franchise Act of 1937, now set forth in section 6201 et seq. (See generally County of Alameda v. Pacific, Gas & Electric Co. (1997) 51 Cal. App. 4th 1691, 1695 [60 Cal. Rptr. 2d 187].) Section 6231, subdivision (c), recognizes constitutional franchises in prescribing the formula for calculating franchise fees. If a utility holds a constitutional franchise, the fee for the complementary franchise is the greater of the Broughton Act formula (2 percent of its gross annual revenues "arising from the use, operation, or possession of the franchise" [ 6006]) or .05 percent of its gross annual receipts. If the utility does not hold a constitutional franchise, then it must pay according to the Broughton Act formula or 1 percent of its gross annual receipts, whichever is greater. Eventually the Broughton Act formula yielded to the 1 percent/0.5 percent formula, which generated a higher fee. (County of Alameda v. Pacific, Gas & Electric Co., supra, 51 Cal. App. 4th 1691, 1695.)