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Brief Primer on San Juan Capistrano Tiered Water Rate Litigation and Appeal

Have you been following the lawsuit over San Juan Capistrano’s tiered water rate structure?  If so, you know that the San Juan Capistrano City Council has appealed an adverse trial court ruling in Orange County Superior Court holding that the city’s tiered rate structure (a structure used by many Southern California cities) violates Proposition 218 and the California Constitution.  If not, the article below will give you a brief overview of the case and its potential impact on Southern California water rates and conservation policy.

What is Prop 218?  It was a 1996 California ballot initiative that amended the California Constitution and was designed to curb the excessive use by local governments of fees, assessments and other charges implemented as a way of circumventing Prop 13′s limits on property tax increases.  In short, Prop 218 requires that any such charges must be subject to voter approval unless it meets certain exceptions.  One of those exceptions was for fees for services “incident to property ownership” that proportionally reflect the “cost of service” provided.  In the San Juan case, the judge ruled that a tiered water rate structure — a structure whereby water became more expensive the more a property owner used — did not proportionately reflect the cost of the service.

Judge Gregory Munoz issued the August 28, 2013 opinion in the matter of Capistrano Taxpayers Association, Inc. v. City of San Juan Capistrano.  In the case, Capistrano Taxpayers Association alleged that:

City has violated Proposition 218 in  several respects.  CTA first alleges that City violated Article XlllD, Section 6(b)(3), which states: “The amount of a fee or charge imposed upon any parcel or person as an  incident of property ownership shall not exceed the proportional cost of the service attributable to the parcel.”  CTA has no quarrel with respect to the new rates under Tier One but argues that in substantially raising water rates under Tiers 2,  3,  and  4, the City failed to provide any evidence to justify the new rates as required by Proposition 218.  Proposition 218 further states: “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.”

Munoz found that the City of San Juan Capistrano failed to carry this burden by proving that the tier 2, 3 and 4 water rates were “proportional to the costs of providing water services to its customers.”  Like many cities, San Juan’s tiered water rate structure is not designed to accurately reflect cost of service, but to discourage high-volume water use and encourage conservation by charging more to rate payers for excessive use.  This is social policy, not cost recovery. If that was the only question, there would be no dispute and no litigation.  What makes this issue complex is that the California Constitution also requires that public policy encourage water conservation.  Striking the balance between Proposition 218 and constitutionally mandated water conservation is where the dispute arises.  Below is the first sentence of Article X, Section 2 of the California Constitution:



SEC. 2.  It is hereby declared that because of the conditions prevailing in this State the general welfare requires that the water resources of the State be put to beneficial use to the fullest extent of which they are capable, and that the waste or unreasonable use or unreasonable method of use of water be prevented, and that the conservation of such waters is to be exercised with a view to the reasonable and beneficial use thereof in the interest of the people and for the public welfare.

So the San Juan case had to balance the constitutional mandate of Prop 218 with the constitutional mandate of Article 10, Section 2.  Both the City and the taxpayers relied on a 2011 case involving very similar facts in the City of Palmdale.  But Judge Munoz interpreted the Palmdale opinion as supporting the taxpayers’ position that a tiered water rate structure was not sufficiently harmonized so as to be constitutionally permitted.  He declared San Juan’s water rate structure to be invalid.

In addition, Judge Munoz agreed with the Capistrano Taxpayers Association in that the San Juan Capistrano water charges improperly included fees or charges imposed on services that were not actually used by or immediately available to the property owner.  In this case, the service was recycled water and all rate payers were charged for the recycled water service whether or not it was available to or used by them.  Once again, the City makes a compelling public policy argument in favor of distributed costs for recycled water:

“City contends that it is appropriate to distribute the cost of recycled water to all ratepayers because they benefit  from this practice in that by supplying recycled water to ratepayers who can  use it,  this  displaces demand for local potable supplies that can  thus be made available to other customers.  In other words, City’s position is that if recycled water customers had to bear the whole cost of this service, its cost would be prohibitively high, demand for potable sources would increase, and everyone’s rates would rise due to the need for more expensive water imports.”

According to the Judge interpreting the Palmdale decision, the policy arguments do not trump the constitutional mandate of Prop 218.

The Capistrano Taxpayers Association also alleged that the City’s issuance of so-called “phantom bonds” to finance water infrastructure violated Proposition 218.  CTA alleges that ratepayers were improperly charged amounts under these phantom bonds, but the Judge sided with the City in concluding that San Juan Capistrano did not violate Proposition 218 on this allegation.

Here is the full judgment, as issued by the court:

The Court finds and declares pursuant to Code of Civil Procedure section 1060 as follows: (a) That the City of San Juan Capistrano did not violate Proposition 218 when it was unable to issue bonds to finance water supply infrastructure and water service and  instead adopted a capital improvement plan for which it continues to collect fees;  (b) That City’s Water Rate Structure violates California Constitution, Article XlllD,  section 6(b)(3), and is invalid because fees (not penalties) are imposed on each parcel of property that exceed the proportional cost of the services attributable to each parcel;  (c) That City is  in  violation of California Constitution, Article XlllD, section 6(b)(4),  by charging certain ratepayers for recycled water that they do  not actually use and that is not immediately available to them;

What’s even more amazing is that the Judge issued an order “restraining and preventing City…from imposing billing or collecting water charges/fees as currently being imposed.”  The City has apparently elected to continue billing and collecting while the case is on appeal.

If you are interested in the full legal opinion, you can read it here.   The California Attorney General has authored multiple legal opinions on the issue of Prop 218 and water, including opinions in support of tiered water rates.  In general, the AG’s argument is that Proposition 218 only regulates water charges that are “incident to property ownership,” and not those based on metered use.  Therefore, metered water charges are outside the scope of Prop 218.  The Howard Jarvis Taxpayer Association authored a rebuttal to the Attorney General’s position, available here, which says:

Such [tiered metered water] rates typically assess higher charges per unit of water as the level of consumption increases. Although tiered water rates conceivably could reflect the actual “cost of service” for water users, such a rate structure is usually imposed for the purpose of encouraging conservation, and thus deviates from “cost of service” requirements under Article XIIID.

The case is attracting a lot of local attention for its precedental impact.  For example, you might be interested in the August 2013 video below, wherein the City of Brea’s city attorney James Markman describes the impact of the San Juan Capistrano litigation on the City of Brea (which also employs a tiered water rate structure) to his City Council.

We will keep you updated on this case as it develops.

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