California Supreme Court lets stand challenge to tiered pricing model for water service

California water utilities cannot impose tiered pricing to discourage excessive water use without showing the price increases are related to the increased cost of providing water service to the customer.

On July 23, the California Supreme Court let stand a lower court ruling that invalidated San Juan Capistrano’s price tier structure for water rates.  In Capistrano Taxpayers Association, Inc. v. City of San Juan Capistrano, the California Court of Appeal held that Proposition 218 requires public water agencies to calculate the actual costs of providing water at various levels of usage.  Water rates must reflect the “cost of service attributable” to a particular parcel.  If a water agency does not calculate the cost of actually providing water at its various tier levels, the tier allocation is suspect and may violate the California Constitution.

Capistrano Taxpayers Association was decided and published in April.  The immediate outcry in response to the decision was powerful — with even California Governor Jerry Brown deriding the decision.  In response, various public interest groups and California’s Attorney General Kamala Harris requested that the California Supreme Court “depublish” the opinion.  “Depublication” would have eliminated the precedential effect of the lower court ruling, so that other water districts could ignore the decision.  However, without further comment, the California Supreme Court refused to depublish the opinion today.  As a result, Capistrano Taxpayers Association is binding on water districts throughout the state.

The state’s Water Resources Board has told the Sacramento Bee that it can live with the ruling.  “The decision does not foreclose conservation pricing,” board spokesman Tim Moran said in a written statement.  It appears that the Water Resources Board may need to re-read Capistrano Taxpayers Association and Proposition 218.

Proposition 218, enacted by voters in 1996, says that it “shall be liberally construed to effectuate its purposes of limiting local government revenue and enhancing taxpayer consent.”  The voters adopted Proposition 218 in order to prevent local governments from using their considerable powers to raise revenue without an economic nexus or a vote of the people.  Proposition 218 provides in relevant part:  “A fee or charge shall not be extended, imposed, or increased by any agency unless it meets all of the following requirements: Revenues derived from the fee or charge shall not exceed the funds required to provide the property related service [and] the amount of the 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.”  If the fee or charge does not meet the economic nexus requirements of the California Constitution, then a water district should call the policy what it is – a tax – and seek voter approval.

Put another way, if a water district seeks to adopt, as a matter of policy alone, a pricing structure to discourage “wasteful water use” such an action by a water district would not survive a challenge under Proposition 218 without a vote of the people.  Taxpayer consent is required for a water district to adopt a “conservation pricing” policy.

Of course, most water districts politically want to avoid a public vote.  It is much easier politically to claim that a tiered pricing structure fits within the economic nexus requirements of Proposition 218. To do that, some heavy lifting by the water district and its consultants will be required.  A water district needs to do more than merely balance its total costs of service with its total revenues.  The water district must correlate its tiered prices with the actual cost of providing water at those tier levels.  Of course, Capistrano Taxpayers Association says that it is not necessary for the water district to calculate a rate for each particular parcel or street address.  However, pricing tiers must be based on water usage, not water budgets.  Water agencies must determine how to pass on the true, marginal cost of water to those customers whose extra use of water forces water agencies to incur higher costs to supply extra water.  In order to make that determination, water agencies will need to compile a robust evidentiary record and supporting professional analysis in support of their decision.

Much of California is still in the midst of a severe drought.  Policy makers are using whatever tools they can to encourage residents and businesses to conserve water — and rightly so.  However, those tools should be used within Constitutional limits. The California Supreme Court’s decision not to depublish Capistrano Taxpayers Association ensures that water districts will have to follow Proposition 218’s mandate.