In Bighorn-Desert View Water Agency v. Verjil (Kelley), (46 Cal. Rptr. 3d 73, Cal., July 24, 2006), the California Supreme Court held that metered water rates charged by public agencies are subject to Proposition 218. The Court disapproved the contrary holding in Howard Jarvis Taxpayers Assn. v. City of Los Angeles (2000) 85 Cal.App.4th 79, upon which some agencies have relied to avoid the mailed notice, public hearing, and majority protest requirements of Proposition 218. The logic of the Court’s decision can be extended to public agency charges for other utility services (such as sanitary sewer and trash collection) that are based on the amount of service delivered.
If applied retroactively (which is the normal rule in California law), this decision would invalidate increases made to rates without following Proposition 218’s procedural requirements since the July 1, 1997, effective date of its provisions concerning property-related fees and charges.
The Court also held that voters may use the initiative power to reduce or repeal any existing property-related fee or charge, and possibly other types of fees and charges as well. The Court did not decide whether the initiative power was limited by statutes that require public agencies to set their utility rates at a level sufficient to pay their operations, maintenance and debt service costs.
Proposition 218, adopted by the voters in 1996, added Articles 13C and 13D to the California Constitution. Article 13C includes a provision that allows the initiative power to be used to reduce or repeal “any local tax, assessment, fee or charge.” Article 13D defines “fee” and “charge” and imposes procedural and substantive requirements regarding their imposition by local government agencies.
In 2002, E.W. Kelley qualified an initiative for the ballot seeking to reduce water rates and charges imposed by the Bighorn-Desert View Water Agency (“Bighorn”) and to require voter approval of any future increases. Bighorn sought a judicial declaration that the initiative was invalid and should not be submitted to the voters. The trial court invalidated the initiative and the California Court of Appeal, in January 2004, affirmed.
Appellate Court Decisions
The Court of Appeal held that only fees and charges as defined in Article 13D are subject to the initiative power under Article 13C. Article 13D defines “fee” or “charge” as a levy “imposed by an agency upon a parcel or upon a person as an incident of property ownership, including a user fee or charge for a property-related service.”
The Court of Appeal held that Bighorn’s rates and charges, because they were imposed based on the amount of water consumed or as a condition of receiving water service, are not imposed solely because of property ownership and therefore do not fit the definition of fee or charge in Article 13D. The Court cited Howard Jarvis Taxpayers Assn. v. City of Los Angeles in support of the holding that consumption-based water rates are not subject to Proposition 218.
The California Supreme Court reviewed the decision and transferred the case back to the Court of Appeal for reconsideration in light of the Supreme Court’s decision in Richmond v. Shasta Community Services Dist., (2004) 32 Cal. 4th 409, where it had stated (in dicta) that “[a] fee for ongoing water service through an existing connection is imposed ‘as an incident of property ownership’ because it requires nothing other than normal ownership and use of property.”
On reconsideration, the Court of Appeal again found that Bighorn’s usage-based water rates are not property-related or imposed as an incident of property ownership. The Court also cited pre-Proposition-218 cases regarding limits set on the initiative power by the Legislature as an alternative basis for the rates’ exclusion from the initiative provisions of Proposition 218. The California Supreme Court again granted review.
Supreme Court Decision
The California Supreme Court reiterated its dicta on the subject from Richmond and made that the basis of its holding that Bighorn’s rates and charges are property-related fees under Article 13D. The Supreme Court rejected the argument that consumption-based rates are not subject to Proposition 218, saying that “once a property owner or resident has paid the connection charges and has become a customer of a public water agency, all charges for water delivery incurred thereafter are charges for a property-related service, whether the charge is calculated on the basis of consumption or is imposed as a fixed monthly fee.” The Supreme Court also disapproved the contrary holding in Howard Jarvis Taxpayers Assn. v. City of Los Angeles that charges for water service that are “primarily based on the amount consumed” (i.e., metered water rates) are not “incident to or directly related to property ownership.”
[Note that the Supreme Court in Richmond decided that connection or capacity charges for new customers are not subject to the rules of Proposition 218.]
The Supreme Court did not decide whether only fees and charges as defined in Article 13D are subject to the initiative power in Article 13C, instead holding only that any fees and charges that are subject to Article 13D are also subject to the initiative power. The Supreme Court also noted that this constitutionally based initiative power prevents the Legislature from restricting it and rejected the Court of Appeals’ suggested alternative basis for exempting Bighorn’s charges from initiative reduction.
However, the Court held that Article 13C does not authorize the use of an initiative measure to impose a voter-approval requirement before an agency may increase existing or impose new fees or charges. Because this invalid provision was a “significant part” of Kelley’s proposed initiative, the Court invalidated the initiative altogether.
Previous KMTG Legal Alerts related to the (overruled) decisions of the appellate court in the Bighorn case include "California Court of Appeal: Water Agency’s Usage-Based Water Rates Are Excluded From The Voter Approval and Initiative Provisions Of Proposition 218," (Sept. 15, 2004), and "Voter Initiative Cannot Be Used to Control Rates Fixed By a Public Water Agency," (Feb. 12, 2004).