In City of Palmdale v. Palmdale Water District (— Cal.Rptr.3d —-, Cal.App. 2 Dist., August 9, 2011), a court of appeal considered whether the new water rate structure of a water district met the constitutional requirements of Proposition 218. The court held the rate structure did not meet Proposition 218’s proportionality requirement because the district’s tier structure establishes that certain customers are charged disproportionate rates without any showing by the district that there is a disparity in the cost of providing water to the customers at different tiers within the structure.
After the Palmdale Water District (“PWD”) had a decrease in revenue of $1.3 million in 2008 but experienced an increase in expenses of $1.2 million, its general manager decided PWD needed to increase its rates by 15 percent in order to balance its budget. PWD retained consultants to prepare a rate study and recommend a new rate structure. PWD serves a population of approximately 145,000, with about 26,000 connections. The breakdown of water usage in the district is as follows: 72 percent for single family residents, 10 percent commercial/industrial, 9 percent multi-family residential, 5 percent irrigation, and 4 percent construction and other customers such as municipalities and schools. PWD depleted its reserves when it recently spent $56 million to upgrade its water plant. PWD sought to issue $38.25 million in debt by July 2009.
The consultants advised PWD’s board regarding two options to determine commodity rates and monthly service charges: Fixed/Variable Cost Allocation (“FV”) option and the Cost of Service (“COS”) option. “With the FV option, monthly fixed charges would represent 75 percent of total costs while the COS alternative would include only billing and customer service costs plus meter charges in the fixed monthly fees.” The consultants stated the FV option “offered ‘more revenue stability’ but a ‘weaker conservation signal’ but that “[t]he reverse was true for the COS option” as it offered “‘less revenue stability’ but a ‘stronger conservation signal.'” Although PWD’s board approved the FV option, it “modified it such that 60 percent of fixed costs would be recovered from fixed monthly charges and 40 percent would be recovered from variable charges.” The board also adopted a resolution approving the 2009 bonds to replenish its reserves but noted that the success of the bonds would be dependent on the adoption of the increase in the water rate.
PWD’s new rate structure “imposes a fixed monthly service charge based on the size of the customer’s meter and a per unit commodity charge for the amount of water used, with the amount depending upon the customer’s adherence to the allocated water budget.” A customer must pay “a higher commodity charge per unit of water above the budgeted allotment, but the incremental rate increase depends on the customer’s class.” All PWD customers pay the same Tier 1 rate at 0 to 100 percent of their water budget allocation and thereafter customers pay increased rates depending on their customer category. There are five tiers utilized in the new rate structure. Residential customers pay the lowest Tier 5 rates, at usage above 175% of their water budget allocation, commercial customers pay the highest rate at usage above 190%, and irrigation customers pay the highest rate at usage above 130%.
The City of Palmdale (“City”) filed a complaint seeking to invalidate the water rate increase and the 2009 bonds. The trial court issued a ruling that validates both the rate increase and the 2009 bonds.
The court of appeal reversed the decision of the trial court finding that the PWD failed to show that it complied with the requirements of Proposition 218. Proposition 218, adopted by California voters in 1996, added articles XIII C and XIII D to the California Constitution. Voter approval for local government and general and special taxes is covered by article XIII C. The procedures, requirements, and voter approval mechanisms for assessments of fees and charges by local government are covered by article XIII D.
Article XIII D mandates that “[n]o tax, assessment, fee, or charge shall be assessed by any agency upon any parcel of property or upon any person as an incident of property ownership except:” (1) an ad valorem property tax, (2) a special tax that receives a two-thirds vote, (3) assessments, or (4) “[f]ees or charges for property related services as provided by this article.” A “fee” or “charge” is defined by article XIII D as “any levy other than an ad valorem tax, a special tax, or an assessment, imposed by an agency upon a parcel or upon a person as an incident of property ownership, including a user charge for a property-related service.” A fee or charge may “not be extended, imposed, or increased by any agency unless:” (1) the revenues derived from the fee or charge do not exceed the amount required to provide the property-related service, (2) the revenues are not used for any other purpose than the purpose for which the fee or charge was imposed, (3) “[t]he amount of a fee or charge imposed upon any parcel or person as an incident of property ownership [does] not exceed the proportional cost of the service attributable to the parcel,” (4) the fee or charge is not imposed for a future use of a service, and (5) the fee or charge is not for general government services. Articles XIII D also provides, “In any legal action contesting the validity of a fee or charge, the burden shall be on the agency to demonstrate compliance with this article.”
City argued that PWD failed to demonstrate that the water rates PWD imposes on its customers are proportional to the cost of providing water service to each parcel. City claimed that PWD violates the proportionality requirement of article XIII D because “for no permissible purpose . . . PWD admittedly targets irrigation users to pay dramatically higher and disproportionate water rates.” City further asserted PWD’s monthly service is arbitrary and the commodity charge tiers and water budget structures are not proportional to the cost of providing water service.
PWD asserted that the structuring of rates into tiers does not constitute a “fee or charge” because the structure merely defines “percentages of a customer’s water budget that define the breaking points for the applicable tiers.” The court rejected this argument because PWD uses the tiers to calculate the customers’ water rates. “Because it is imposed for the property-related service of water delivery, [PWD’s] water rate, as well as its fixed monthly charges, are fees within the meaning of article XIII D.”
The court also rejected PWD’s argument that its water rate structure is proper because it is aimed at promoting conservation of water. PWD cites to Article X, section 2, of the California Constitution, which promotes water conservation and Water Code section 372 which allows a public entity to impose “allocation-based conservation water pricing.” The court found that while section 372 “contemplates allocation-based conservation pricing consistent with Article X, section 2, PWD fails to explain why this provision cannot be harmonized with Proposition 218 and its mandate for proportionality.” Most importantly, “PWD fails to identify any support in the record for the inequality between tiers, depending on the category of user.” PWD claims its system recognizes that the use of water for domestic purposes is superior to its use for irrigation purposes. The court acknowledged that while Water Code section 106 states that water used for domestic purposes is the highest use, it also states that the next highest use of water is for irrigation. PWD’s tier structure does not comport with section 106 because commercial customers may exceed their budgeted allocation at a lower cost than irrigation only users and PWD does not explain this disparity.
Irrigation customers are charged more for exceeding their budgeted allocation but PWD failed to show that there was a disparity in the cost of providing water to irrigation customers. Irrigation customers are the users that are potentially most impacted under PWD’s pricing structure. Under PWD’s system, a residential or commercial user “could waste or inefficiently use water by, for example, filling, emptying and refilling a swimming pool or excessively hosing off a work site or parking lot without the same proportional cost because of the significant disparity in tiered rates for water use in excess of the customer’s allotted water budget.” PWD, who bears the burden to demonstrate compliance with article XIII D, failed to show that the disparity in its rate system was justified.
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Jeffrey L. Massey | 916.321.4500
Jon E. Goetz | 805.786.4302