Appeals court throws out San Juan Capistrano's tiered water-use rates

Appeals court says not all tiered water rates are illegal must be based on the cost of providing water

An appeals court decision handed down Monday has thrown into question a major component of California's drought conservation efforts.

California's 4th District Court of Appeal found that San Juan Capistrano's tiered water rate structure was unconstitutional because it charged more for water than it cost the city to provide the service.

The court said the city's policy — which penalized water guzzlers with higher rates — failed to base the fees on the actual cost of providing water to customers, as required under Proposition 218.

At least two-thirds of California water agencies use some type of tiered structure, which officials say has been an effective tool for encouraging customers to use less water. The remaining agencies use a flat-rate structure based on the units of water consumed.

The pressure to reduce water use with higher pricing has intensified since Gov. Jerry Brown's April 1 executive order requiring urban communities to cut water use by 25% over the next year. In his order, he called on water agencies to employ rate structures that encourage conservation.

Monday's ruling does not invalidate all tiered water rates. But it left officials scrambling to determine whether their rates can withstand legal challenge.

"The practical effect of the court's decision is to put a straitjacket on local government at a time when maximum flexibility is needed," Brown said in a statement. "My policy is and will continue to be: employ every method possible to ensure water is conserved across California."

San Juan Capistrano officials argued that the city's fee structure encouraged water conservation, but the appeals court justices wrote that this imperative did not free them from the law.

"Designating something a 'conservation rate' is no more determinative than calling it an 'apple pie' or 'motherhood rate,'" Acting Presiding Justice William W. Bedsworth wrote in the opinion. "The water agency here did not try to calculate the cost of actually providing water at its various tier levels. It merely allocated all its costs among the price tier levels, based not on costs, but on pre-determined usage budgets."

Benjamin T. Benumof, an attorney for the Capistrano Taxpayers Assn., which sued the city, said the decision "rightfully vindicated" Proposition 218.

"What this opinion does is give everybody a road map. Water retailers are going to have to scrutinize their rate structures more thoroughly. It does not invalidate tiers per se; it invalidates arbitrary tiers," Benumof said.

Although tiered rate structures are not unconstitutional, the appeals court said, officials must demonstrate that fees correspond to the cost of providing the service. If heavy water users cause a water provider to incur additional costs, it would be legal to charge them for those increases, the justices wrote.

"There is nothing ... that prevents water agencies from passing on the incrementally higher costs of expensive water to incrementally higher users," Bedsworth wrote. "That would seem like a good idea."

In a prepared statement, San Juan Capistrano city officials said they were analyzing the ruling and considering whether to appeal. The city has already flattened its tiers and tied water charges more directly to costs after a state Superior Court judge in 2013 ruled the tiered structure invalid.

It remains unclear exactly how many state water agencies may be affected by the opinion. Local rate consultant Sanjay Gaur estimated that at least one-third of California water agencies will need to "do a better job explaining their tiered rates and the rationality behind them" as a result of Monday's decision.

Still, he said, "This decision shouldn't limit agencies' abilities to promote conservation through pricing. The agencies may need to be more rigorous in developing the rates, but there is a way to do it."

For example, Gaur said, water suppliers could tie costs back to money spent on infrastructure or to the price tags that come with conservation programs. "If you're lazy, this is going to be hard for you," he said. "But this shouldn't stop you from achieving what you want."

The Los Angeles Department of Water and Power is considering a plan to expand its tiers and charge even more for higher water use. On Monday, agency officials said they were reviewing the court's decision.

San Juan Capistrano adopted its tiered rate structure in 2010, charging customers who used small amounts of water a lower rate than customers who used larger amounts. The city's rate schedule charged customers $2.47 per unit — 748 gallons — of water in the first tier and up to $9.05 per unit in the fourth.

A group of city taxpayers filed suit, saying the plan violated state law.

A trial court agreed with the plaintiffs, and the appeals court opinion filed Monday affirmed that ruling.

Kelly Salt, a Proposition 218 expert based in San Diego who wrote an amicus brief defending the city of San Juan Capistrano, called the decision a "cause for concern."

"Tiered water rates provide an important price signal for conservation," Salt said. "With this ruling in hand, public agencies are going to want to make certain that their rate structures conform."

That, she said, could require agencies to spend months studying rates while trying to comply with new state conservation demands.

"In this case, the court said [agencies] have to calculate the incremental cost of providing water at the level of use represented by each tier," she added. "That's difficult to do. Not impossible, but difficult."

The court's decision comes as one of the most severe droughts in modern California history persists. Irrigation deliveries have been slashed, and farmers expect to idle more than 500,000 acres of cropland this year. Groundwater levels in some parts of the San Joaquin Valley have sunk to record lows as growers drill more and deeper wells. Some small communities dependent on local sources have run out of water.

Although major reservoirs in Northern California hold more water than they did a year ago, the Sierra Nevada snowpack that normally provides the state with about a third of its water supply hit a record low for April 1.

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