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September 12, 2011

Water District Failed to Show that Rate Structure Complied with Proposition 218 Requirements for Property-Related Fees

Water District Failed to Show that Rate Structure Complied with Proposition 218 Requirements for Property-Related Fees

City of Palmdale v. Palmdale Water District [No. B224869; filed 8/9/11, pub. order & mod. 8/25/11]

By Andrea A. Matarazzo

The City of Palmdale sought to invalidate water rate increases by the Palmdale Water District (“PWD”), arguing that PWD’s new rate structure violated the constitutional requirements of Proposition 218.  Under Proposition 218, fees imposed as an incident of property ownership cannot exceed the proportional cost of service attributable to the parcel.  The trial court found in favor of PWD and upheld the water rates, but the Second District Court of Appeal reversed.

The City argued that PWD failed to demonstrate that its water rates were proportional to the cost of providing water service to each parcel, and the appellate court agreed.  The City asserted that (1) for no permissible purpose, PWD targets irrigation users to pay dramatically higher and disproportionate water rates; (2) PWD’s monthly service charge is arbitrary and not tied to the actual costs of providing identified services to each meter; (3) PWD’s commodity charge tiers are not proportional to the costs of providing water service; and (4) PWD’s water budget structure is not proportional to the costs of providing water service and fails to achieve its stated purpose.  The City further asserted that PWD failed to prove its revenues under the new rate structure would not exceed the costs of providing water service.  Instead, they City argued, the new rate structure “all but assures that revenues PWD receives from customers in the higher tiers will be more than is required to cover PWD’s costs of service.”  Further, the City said, PWD’s new rates would require irrigation users to pay for services they cannot receive.

According to the City, the rate structure “charges a few irrigation users a vastly disproportionate share of PWD’s total costs.  PWD makes no showing whatsoever that PWD’s cost of delivering service to those irrigation users is proportionately higher than PWD’s costs of delivering service to residential and commercial users.  The record shows that PWD intentionally seeks to recoup most of its costs from a relatively few irrigation users (who happen to be institutions such as the City), so as to keep costs to the vast majority of PWD’s customers proportionately low. This sort of price discrimination is not allowed under Proposition 218.”


In response, PWD argued that its structuring of the various tiers did not even constitute a “fee or charge” for purposes of Proposition 218, but merely “defined percentages of a customer’s water budget that define the breaking points for the applicable tiers.”  The court rejected this position as but “inconsistent with the law,” because “PWD uses these tiers to calculate its customers‟ water rates.”  As the court explained, “[b]ecause it is imposed for the property-related service of water delivery, [PWD’s] water rate, as well as its fixed monthly charges, are fees or charges” within the meaning of Proposition 218.  “[A]ll charges for water delivery” incurred after a water connection is made “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.”


PWD further argued it was entitled to promote conservation using its proposed tiered rate structure pursuant to Article X, section 2, of the California Constitution pertaining to beneficial, non-wasteful water use. PWD also cited Water Code section 372 (allocation-based conservation water pricing), which provides that a public entity may employ allocation-based conservation water pricing that meets specified criteria.  The court was not persuaded, stating that “[w]hile this statute 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.  PWD fails to identify any support in the record for the inequality between tiers, depending on the category of user.”


PWD also claimed “the distinct tiers for irrigation users are [further] supported by Water Code section 106, which expressly recognizes that the use of water for domestic purposes is superior to that for irrigation usage.” The court pointed to “the precise language of section 106,” however, which states: “It is hereby declared to be the established policy of this State that the use of water for domestic purposes is the highest use of water and that the next highest use is for irrigation purposes.”  [Italics added.]  “[U]nder PWD‟s tier structure,” the court observed, “commercial users are permitted to use amounts of water exceeding their budgeted allocation under Tier 1 at a lower cost than irrigation only users—without any explanation for this disparity even attempted by PWD.”  As such, “Article X, section 2 is not at odds with [Proposition 218] so long as, for example, conservation is attained in a manner that ‘shall not exceed the proportional cost of the service attributable to the parcel.’”  The record in this case showed that efficient water use was already built into the customer’s budgeted allocation (the “Tier 1” rate which is equal for all users).  Yet, irrigation customers such as the City were charged disproportionately higher rates when they reached 130 percent of their budgeted allocation, as compared to other users who would not reach such high rates until they exceeded 175 percent (single family residential) and 190 percent (commercial), without any showing by PWD of a corresponding disparity in the cost of providing water to these customers at such levels.  The appellate court thus found that PWD failed to meet its burden to show that its rate structure complied with the requirements of Proposition 218.


By Andrea Matarazzo


Andrea advises and advocates for private and public clients in all aspects of project permitting and entitlements, environmental compliance, and litigation, particularly regarding environmental review under CEQA and NEPA, land use and zoning issues, air quality regulation, climate change law and policy, water supply and water quality mandates, state and federal endangered species laws, wetlands permitting, and other regulatory requirements.


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