California Constitution article XVII: Local Flexibility in Water Service Rate Structure Design

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Grant Knight
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2 California Constitution article XVII: Local Flexibility in Water Service Rate Structure Design May 10, 2017 PRESENTED BY Kelly J. Salt, Best Best & Krieger, LLP Partner 2015 Best Best & Krieger LLP

fullest extent of which they are capable, and that the waste or

3 Article X, section 2 (1928) 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

4 Brydon v. E. Bay MUD (1994) Shifting the costs of environmental degradation from the general public to those most responsible is consistent with the objectives of Proposition 13

5 Proposition 218 (1996) California Constitution, article XIII D, section 6(b) substantive provisions: Revenues from property-related fees shall not exceed the funds required to provide the service Property-related fees shall not exceed the proportional cost of providing the service attributable to the parcel on which they are imposed

6 Legal Problem Number 1 Substantive provisions limit the ability of public agencies to establish discounted rates for lowincome customers Cannot use ratepayer property-related water service fees to fund discounts Violates proportionality requirements Not all agencies have unrestricted revenues to fund discounts

7 Legal Problem Number 2 Substantive provisions limit the ability of public agencies to structure water rates designed to encourage water conservation and water use efficiency Courts exercise their independent judgment, resulting in conflicting court decisions Not all agencies have multiple sources of supply

8 CTA v. City of San Juan Capistrano (2015) Inclining block rates that go up progressively in relation to usage, are compatible with Article XIII D, section 6(b) City failed to demonstrate that the tiers correspond to the actual cost of providing service at a given level of usage

9 CTA v. City of San Juan Capistrano While tiered, or inclined rates that go up progressively in relation to usage are perfectly consonant with article XIII D, section 6, subdivision (b)(3) and Bighorn, the tiers must still correspond to the actual cost of providing service at a given level of usage. As we will say numerous times in this opinion, tiered water rate structures and Proposition 218 are thoroughly compatible so long as and that phrase is drawn directly from Palmdale those rates reasonably reflect the cost of service attributable to each parcel.

10 CTA v. City of San Juan Capistrano [T]there is nothing at all in subdivision (b)(3) or elsewhere in Proposition 218 that prevents water agencies from passing on the incrementally higher costs of expensive water to incrementally higher users. That would seem like a good idea. [W]e see nothing in article XIII D, section 6, subdivision (b)(3) that is incompatible with water agencies passing on the true, marginal cost of water to those consumers whose extra use of water forces water agencies to incur higher costs to supply that extra water. Precedent and common sense both support such an approach.

11 CTA v. City of San Juan Capistrano Upper tiers are not penalties Very narrow reading of Article X, section 2 Brydon v. EBMUD is a pre- Proposition 218 case AWWA M1 Manual cannot be used to excuse agencies from demonstrating the cost of service

12 CTA v. City of San Juan Capistrano Potable customers may be required to pay capital costs of a recycled water system Recycled water is a new source of water Government Code 53750(m) water is part of a holistic distribution system

13 CTA v. City of San Juan Capistrano Proposition 218 protects lower-than-average users from having to pay rates that are higher than the cost of service for them because those rates cover capital investments their levels of consumption do not make necessary.

14 What are the marginal costs of water? Sources of supply Water conservation and efficiency programs System Capacity

15 Conflicting Court Decisions There are at least three court decisions that analyze the proportionality requirements of Article XIII D, section 6(b) differently than San Juan Capistrano court Griffith v. Pajaro Valley Water Management Agency Morgan v. Imperial Irrigation District Moore v. City of Lemon Grove

16 Griffith (2013) and Morgan (2014) Property-related fees do not need to be established on parcel-by-parcel basis Rate-makers may group similar users together (i.e., calculate fees on a class-by-class basis) Apportionment is not a determination that lends itself to precise calculation Different users create different costs Ratemaking data does not need to be perfect

17 Moore v. City of Lemon Grove (2015) Fees are not easily correlated to a specific, ascertainable cost An agency has a reasonable degree of flexibility to apportion the costs Apportionment in accordance with the City s informal, best cost estimates is sufficient

18 Cumulative Impact Multiple lawsuits have been filed challenging tiered rates as a result of the Capistrano decision Differing appellate court decisions have created confusion for public agencies Tiered rates are constitutional, but more flexibility is needed for those agencies that want to use tiered rates to promote water conservation and water use efficiency Optional funding mechanism is needed for agencies that wish to provide low-income discounts but do not have revenue offsets to fund them

19 Solution Amend the Constitution Complaining about a problem without proposing a solution is called whining. - Theodore Roosevelt

20 What would the measure do? Add new Article XVII to the California Constitution Definitions: Fee or charge means any levy for property-related water service, 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 Property-related water service means water service having a direct relationship to property ownership Water means any system of public improvements intended to provide for the production, storage, supply, treatment, or distribution of water from any source

21 What would the measure do? Provide public agencies with the discretionary authority to: structure property-related water service fees and charges to encourage water conservation and water use efficiency fund low-income customer discounts with revenues from property-related water service fees and charges without having to comply with the proportionality requirements of Article XIII D, section 6(b)

22 What would the measure do? Prohibit the State from: reallocating, transferring, borrowing, appropriating, restricting the use of, or otherwise using or directing the revenues of any property-related water service fee or charge imposed by an agency requiring a public agency to use a particular rate structure for property-related water service fees and charges conditioning or impairing an agency s rights or access to privileges granted by the State, including funding by the State, based on an agency s choice of rate structure for a property related water service fee or charge

23 What would the measure do? Declare that any propertyrelated water service fee imposed pursuant to the authority granted in article XVII is not a special tax or a tax within the meaning of article XIII C of the Constitution

24 Questions? Kelly J. Salt Partner Best Best & Krieger LLP 655 W. Broadway, 15 th Floor San Diego, CA Phone: (619)

Water Investigation Zone No. 2 Fee Analysis Report Fiscal Year

SAN JOAQUIN COUNTY FLOOD CONTROL & WATER CONSERVATION DISTRICT Water Investigation Zone No. 2 Fee Analysis Report Fiscal Year 2017-2018 Prepared by: San Joaquin County Department of Public Works Water