An appellate court ruling due by next week could put a glitch in plans to reach Gov. Jerry Brown's goal of slashing urban water use by 25% statewide.
When Brown announced on April 1 his historic order to cut water use from 2013 levels, he told water agencies to use pricing structures that encourage conservation. In other words, he directed them to charge higher rates to people who use the most water.
But those kinds of rate structures are under fire in a San Juan Capistrano case that could affect water districts statewide. State law prohibits water agencies from charging more for water than the cost of producing and delivering it. A group of San Juan Capistrano residents has challenged the city's tiered rate structure, arguing that it resulted in arbitrarily high fees.
About two-thirds of California water agencies already use some type of tiered structure, and the Los Angeles Department of Water and Power is considering expanding its tiers, charging even more for high use.
An appeals court is expected to issue a decision in the case this week. If the court publishes its opinion, water lawyers say the decision could have major implications for agencies that use or are considering adopting tiered rates.
Stephanie Pincetl, director of the California Center for Sustainable Communities at UCLA, is among several experts who say tiered water rates are crucial to conservation. Rates are likely to increase no matter how the San Juan Capistrano case is decided, she said, and tiered rates are a more equitable way to charge for water use.
What are tiered rate structures and who uses them?
At least two-thirds of California water districts use some form of a tiered rate structure. Those programs usually charge less for low usage and progressively more as use increases. The city of San Juan Capistrano's 2010 rate schedule, the one being challenged in court, charged customers $2.47 per unit of water in the first tier and up to $9.05 per unit in the fourth. The Los Angeles Department of Water and Power also employs a tiered rate structure, but it has only two tiers separated by less than $2 in price.
About a third of California's urban water districts use flat rate structures that charge customers the same amount for each unit — 748 gallons — of water used. Typically under those structures, customers are charged the same amount no matter how much water they use.
Experts say steep tiers encourage customers to keep their water use — and their bills — low.
Why did the lower court find that tiered rates were illegal in San Juan Capistrano?
Residents argued that the city's tiered pricing violated Proposition 218, a 1996 law intended to prevent local governments from gouging taxpayers. The law prohibits agencies from charging customers more than the "cost of the service" provided.
At as much as $9.05 a unit in the highest tier, the city was charging customers who used the most water more than the actual cost to deliver it, the plaintiffs said.
A Superior Court judge agreed, declaring the city's rate structure invalid in 2013. In his decision, Judge Gregory Munoz wrote that the city failed to establish "credible evidence that the rate increases were proportional to the costs of providing water."
Since that ruling, the city has flattened its tiers and tied charges more directly to water costs while it awaits the appellate court decision.
What could the appellate court decide?
The court could return a narrow ruling that pertains only to San Juan Capistrano or it could invalidate tiered rates entirely, said Michael G. Colantuono, an attorney representing the city in its case.
More likely, however, the court will take a middle road. It could issue a ruling that reminds water districts that they must explicitly tie water charges to actual service costs. It could also issue a prescriptive ruling that dictates specifically how a water agency can allocate its costs and structure its rates.
If the court rules in favor of the residents, water agencies could still justify using tiered rates by tying them to a specific water source, such as the Colorado River or a local aquifer. Then, agencies could charge customers based on the varying costs of getting water from those sources. The key would be ensuring the rates are not what plaintiffs called "arbitrary," Benjamin T. Benumof, an attorney for the plaintiffs, and other water lawyers have said.
Water lawyers have also suggested that agencies that receive water from wholesalers, such as the Metropolitan Water District of Southern California, could tie increased costs to surcharges imposed during rationing. The MWD is expected to vote Tuesday on a plan to cut its water allocations by 15%. Water districts that use more than they are allocated would be hit with expensive surcharges, costs they are likely to pass on to customers who use large amounts of water.
The Los Angeles Department of Water and Power is considering expanding its price tiers from two to four to make big water users pay even more.
"LADWP is closely monitoring the San Juan Capistrano case," the agency said in a statement Monday.
What are the implications of this case for the rest of California?
If the appeals court publishes its opinion as expected, the ruling will become case law in Orange County, which lawyers can cite as precedent in future cases, Benumof said. If the 4th District Court of Appeal rules in favor of the plaintiffs, water districts that use similar tiered rate structures could be sued on similar grounds if they don't change how they charge.
Water districts located in appeals districts outside of Orange County would not technically be bound by the decision, but water lawyers are likely to rely on it as they argue future cases, Benumof said.
It's not clear whether San Juan Capistrano would appeal if the city loses.
John Perry, one of the residents who helped create the taxpayer group that sued the city, is now on the City Council. On Monday, he said that because the rate structure has been revised, the council is unlikely to instruct the city to appeal.