The city of Palo Alto would issue refunds totaling $17 million to its gas customers under a proposed settlement with Miriam Green, a resident who sued the city over its historic practice of transferring funds from its municipal utility to pay for basic city services.

Attorneys for both sides in the lawsuit filed last week a joint motion for "stipulated reversal," which would conclude the yearslong legal battle over gas transfers and which would require Palo Alto to refund funds to its gas customers. The agreement will need to be formally approved by the 6th District Court of Appeal and then the Santa Clara County Superior Court before it's official. Provided that happens, the deal would bring to a conclusion one of the most complex lawsuits in the city's recent history, one that has prompted extensive debate about appropriate use of utility rates and that has spurred the City Council to place a measure on this year's ballot to address this issue.

Under the agreement, which was reached through mediation, Palo Alto would issue the refunds in on-bill credits over three installments over the next 24 months. The first installment would be due after the final settlement order becomes official, the second one 12 months later and the final one 24 months after the order takes effect.

Former customers would be able to receive their refunds by check and customers over the age of 65 will be able to request the refund in a lump sum rather than through on-bill credits under the proposed settlement.

The settlement follows six years of litigation, a judgment against the city and appeals by both parties. Santa Clara County Superior Court Judge Brian Walsh contended in his 2020 ruling that the city's transfer of funds from its gas utility to its general fund constituted an illegal tax and violated Proposition 26, which limits utility rates to the "reasonable cost" of providing service. The city's transfers, the court found, exceeded this reasonable cost and thus constituted an illegal tax under state law.

The two sides were also in dispute over the manner in which the refunds should be issued, with the city offering to do so through bill credits and Green's attorneys calling for checks that would be issued over two installments.

In its appeal last year, attorneys representing Palo Alto pointed to the City Charter, which includes language that voters approved in 1950 authorizing the city to use utility revenues to pay for all costs associated with the utility and pay the remainder into the general fund, which finances basic services such as public safety, parks and libraries. Superior Court Judge Sunil Kulkarni rejected that argument in September 2021 and suggested that voters in 1950 likely did not know whether they were approving a fee or a tax.

As the complex case moved to the California 6th District Court of Appeal, the two sides entered into the court's mediation program. Over discussions facilitated by mediator Bob Blum, they entered into an agreement that they say would lead to faster resolution and obviate further appeals to the state's highest court.

"This Court's order reversing and remanding for further proceedings consistent with the parties' settlement agreement would allow the trial court to consider the settlement, order the parties to give notice of the settlement terms to the class, and enable the City to provide relief to the class more quickly than if the parties litigated this appeal and, likely, sought Supreme Court review of the novel issues this case presents," the joint motion states.

City Attorney Molly Stump said that if the settlement is approved, the current Green lawsuit would be resolved. However, the two sides remain in disagreement over one issue: The rent that the city charges its gas and electric utilities for use of general fund assets. It's possible that that issue would be subject to future litigation, she said.

She said it will likely take months for the two courts to finalize the settlement.

"The Court of Appeals now has to make a decision on whether they will advance this and send it back to the trial court with specific instructions to implement the settlement," Stump said.

The city maintains in the settlement agreement that it has not violated any laws or that there is "any basis for liability for any of the claims that have been, are, or might have been, alleged in the Litigation."

"Nonetheless, Respondent has concluded that it is desirable that the Litigation be fully and finally settled in the manner and upon the terms and conditions set forth in this Agreement," the settlement states.

Stump noted that because the Green lawsuit and settlement pertains to gas rates paid in the past, it will not have an impact on Measure L, a November measure that would reaffirm the city's historic practice of transferring funds from the gas utility to the general fund.

The measure would authorize the city to transfer no more than 18% of the gas utility's gross revenues to the general fund, which comes out to about $7 million per year. According to the measure, funds would support general services such as roads, parks, libraries, climate change reduction and public safety services.

The class action settlement agreement signed by Green, City Manager Ed Shikada and attorneys for both sides, notes that the settlement represents "the compromise of highly contested issues." Both parties "continue to believe that they can and will prevail on their respective appeals."

"On the other hand, the Parties acknowledge that a judgment has been entered and they have considered the risks and potential costs of continued litigation of the Consolidated Action and litigation of the Tolled Claims, on the one hand, and the benefits of the proposed settlement, on the other hand, and desire to settle the entire Litigation upon the terms and conditions set forth in this Agreement," the settlement agreement states.