Stanford Think Tank Summarizes San Juan Capistrano Water Rate Litigation

The San Juan Capistrano water rate litigation is attracting the attention of municipal water watchers around the State.  Astute readers know that we provided a water rate litigation primer in this article.  The Stanford Woods Institute for the Environment and the Bill Lane Center for the American West (both Stanford University affiliated environmental think tanks) have published their own summary of the San Juan Capistrano water litigation (captioned in the courts as Capistrano Taxpayers Association v. City of San Juan Capistrano (2013)).  The Stanford Woods Institute is an environmental policy organization with a mission “to produce breakthrough environmental solutions that protect and nurture our planet to meet the vital needs of people today and for generations to come.”  The Bill Lane Center is another policy shop “dedicated to advancing scholarly and public understanding of the past, present, and future of western North America.”  The summary is a very helpful read, and interested readers should take the time to read the whole thing.  Below we’ve excerpted some highlights.

For example, the Stanford article emphasizes the fact that the San Juan Capistrano case has implications far beyond the city’s borders.  Indeed, the outcome of the appeal is of critical importance for the many cities and municipalities that use tiered water rates to balance Prop 218′s tax requirements and the California Constitution’s conservation requirements.

While it remains to be seen whether the ruling will stand and just how far it may ultimately reach, its potential to further complicate the ability of California water agencies to provide reliable, clean water to communities should motivate decision makers in Sacramento and voters throughout the state to come to their rescue.

Recall that the opinion issued two adverse rulings against the city’s water rate structure.  First, the court held that requiring ratepayers to pay higher tiered rates for excess water consumption violated Prop 218′s rule on proportionality.  According to the Stanford summary:

Proposition 218 requires that all taxes and fees imposed by a public agency must not be any greater than the “cost of service” to the individual. Litigants in the Capistrano case argued that higher tiers do not involve higher costs per unit, and therefore violated Proposition 218.  The court agreed. Defendants unsuccessfully argued that tiered rates are a proven means of reducing waste of water, which is a separate Constitutionally mandated goal of California (see Article 10 Section 2). While the court acknowledged the importance of conservation, it reasoned that agencies must achieve that goal without violating Prop 218’s requirement for proportionality.

Assuming the Munoz decision survives appeal, what should cities do to preserve their tiered rate structures (if that’s what they choose to do)?

The lessons from this ruling and a potential way forward appear to be twofold.  First is that public agencies must work with their rate consultants to establish a clear, understandable, and compelling record for the courts that demonstrate that new rates will result in water savings, that new rates are equitable, and that higher water users place a disproportionate burden on water systems, particularly in the cost of new supplies, and therefore warrant higher rates.  A second option available to agencies is to simply structure higher tiers as penalties, which are exempted from Proposition 218.  Characterizing excessive water use as wasteful and subsequently penalizing those actions, would appear to be a reasonable action, although likely to meet with political opposition from some.

The second portion of the opinion dealt with fees for recycled water.

The second component of the case involved a fee imposed on all water customers to pay for a recycled water system. The agency planned to treat its wastewater to state health code standards and pipe it back to some of its customers for use in landscape irrigation and other non-potable purposes. Proposition 218 requires that a fee is charged only for service that is “actually used by, or immediately available to, the owner of the property…” Because the water recycling system does not distribute that water to every customer, the plaintiffs argued and the court agreed that it was a violation to pass the costs on to everyone.  The water utility argued unsuccessfully that it is uneconomical to distribute recycled water to every customer and that all customers do benefit because the use of recycled water by some customers frees up potable water by others. Surprisingly, the court did not agree with that reasoning.

On the issue of charging for recycled water, the Stanford summary opines:

If it stands, this ruling would present significant challenges for water utilities in California. Water systems are complex institutions with intricate, intertwining infrastructure, much of which is used for meeting some customer needs but not all.  Taken in their entirety, water systems are designed to provide a service to customers and not merely deliver an assortment of commodities, with one flavor of water going here and another there. It is completely impractical to imagine a utility having to allocate costs strictly to who uses what part of the water system. Many utilities provision water from several different sources, each of which involves different pieces of infrastructure and different costs of service. If they were forced to track which of their customers received which water and charge them differently – the logical extension of the ruling in San Juan Capistrano – it would result in an inefficient mess. Should we now expect water agencies to track individual water molecules and which pipes they travel? Let’s hope not!

As we said, read the entire Stanford summary.  You can see that the authors were a little surprised with Judge Munoz’s ruling.  It is fair to say that many in California felt that tiered rate structures were an acceptable balance between Prop 218 and California conservation requirements.  Striking down the ability to charge for recycled water seemed equally surprising to the authors.  The appeal could go either way, and there’s much more at stake here than just San Juan Capistrano’s water bills.

If you want to go straight to the source, here is the ruling (PDF) from Judge Munoz in the Superior Court.  Also, we extend a special thank you to the reader who sent us the link to this article.