Appellate Court Rules State Water Resources Control Board’s Annual Water Right Fees Unconstitutional, Orders Potential Rebate

The annual water right fees that have been levied by the State Water Resources Control Board (SWRCB) for the past three years are unconstitutional and invalid, according to a decision by the Third District Court of Appeal in Sacramento.

In a decision issued late on January 17, 2007, the Court found that the SWRCB’s regulations imposing new fees on water right holders do not meet applicable legal standards. The Court ordered the SWRCB to develop new fee schedules and a procedure for determining refunds.

The SWRCB had imposed the fees after the Legislature eliminated millions of dollars in State funding for the SWRCB’s Division of Water Rights. California water users, including water districts supplying water to thousands of farmers and millions of Californians, decried the millions of dollars in sudden new fees. The California Farm Bureau Federation, the Northern California Water Association, the Central Valley Project Water Association and others filed suit to overturn the SWRCB fee regulation. The legal challenge alleged a range of specific problems with the fees, including that fee amounts had no reasonable relationship to the SWRCB’s actual costs of administering water rights.

Basis for Invalidating SWRCB Fees

While upholding the SWRCB’s authority to impose charges as regulatory fees, the Court noted that the charges were required to have a “fair or reasonable relationship to the payor’s burdens or benefits from the regulatory activity.” Proportionality on an individual basis is not required, and “a flexible assessment of proportionality within a broad range of reasonableness in setting fees” is allowed. However, the Court concluded that “the fee structure in this case crosses the line.”

Several reasons factored into the Court’s decision that the SWRCB’s new fees imposed on ordinary water right permit and license holders lacked proportionality between the burden imposed and the benefits conferred through the SWRCB’s regulatory program:

  • The Division of Water Rights protects non-paying water right holders, such as riparians and pre-1914 appropriators, by protecting their priority to water through conditions on permit and license holders, investigating and enforcing complaints, and occasionally adjudicating water rights. The non-paying water right holders “account for 38% of the water subject to water rights” in the state, yet they were assessed no fees because the SWRCB lacks jurisdiction over them.
  • The annual fees collected from existing permit holders subsidizes the cost of processing new applications and permits, thereby reducing the one-time fees assessed to permit and license applicants. Applicants paid only 10% of the costs to process their requests for new water rights.
  • A third of the SWRCB’s regulatory program is for the benefit of the environment and the general public, which pay no fees for such activities.
  • There was no showing by the SWRCB that “the greater the diversion authorized, the greater the regulatory job,” which would be the only equitable basis for allocating those costs to water right holders on an acre-foot basis.

The Court provided an additional basis for invalidating the fees allocated to water users who obtain all or part of their water supplies pursuant to contracts with the federal Central Valley Project (CVP) owned and operated by the United States Bureau of Reclamation. The Court held that it was unlawful for the SWRCB to levy fees on CVP water contractors based on the total face value of all CVP water rights in California—representing approximately 116 million acre-feet of water—when the total amount of water subject to delivery under CVP water contracts is only 6.6 million acre-feet. In effect, this increased the SWRCB-related fees for federal contractors from the usual $0.03 per acre-foot to $0.37 an acre-foot.

The Court held that fees may be lawfully assessed on the possessory interest a contractor has in its CVP water contract, but not on exclusively federal property interests, such as federal reserved water rights and rights for power generation. Fees on CVP contractors are legal “only to the extent of the federal contractors’ contractual interest in the Bureau’s water rights permits”— in this case, only on the 6.6 million acre-foot contractual water entitlement held by CVP water users. Under the Court’s decision, a significant fee reduction would be expected for CVP water users from the Sacramento Valley to the San Joaquin Valley, and in Santa Clara and San Benito counties.

Establishment of New Fees and Refunds

The Court directed the SWRCB to adopt a valid fee schedule within 180 days of the final judgment, and to determine, based on the valid new fees, whether a refund is due to those who paid the illegal annual fees and filed a petition for reconsideration of the fees assessed for fiscal year 2003-2004.

At present, CVP water contractors seem to be the most likely water users to receive a significant refund, while fees for other water users and water right permit applicants might remain unchanged or even increase. The final amounts will be determined by the new fee schedule to be promulgated by the SWRCB.

The timeline for any refunds is subject to great uncertainty. First, the SWRCB may seek review of the Court of Appeal’s decision by the California Supreme Court, and the decision will not be final until either the Supreme Court denies review or 30 days after a Supreme Court decision. Second, refunds will be based on new fee schedules to be adopted by the SWRCB, which might again be delayed as a result of further legal challenges.

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