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Drowning PiggyIn a ruling that could dramatically alter the way Californians are billed for their water, while also making it more difficult to impose higher rates for conservation purposes, an Orange County appellate court ruled Monday that water agencies cannot charge tiered rates unless they are directly tied to the actual cost of providing water.

Many California water purveyors, including California American Water on the Monterey Peninsula, have imposed steeply graduated rates intended to encourage heavy water users to cut back. Whether private companies such as Cal Am would be affected by Monday’s opinion is not clear. It could be significant, though, that the 3-0 ruling by a panel of the 4th District Court of Appeal does not seem to make a distinction between government bodies and private companies. (Previous Partisan article on the lawsuit)

The ruling adds a wrinkle to California’s current water crisis, which has led Gov. Jerry Brown to order sweeping conservation measures and to order all local water agencies to implement tiered water pricing. About two thirds of the water districts in the state use tiered pricing and many of them have banded together in hopes of preventing a ruling such as the one handed down Monday. They argue that tying the tiered rates to actual costs can be done but the calculations would be exceptionally complex, time consuming and, ultimately, expensive. Most water agencies, Cal Am included, created the higher tiers arbitrarily, essentially calling them a penalty rather than an actual fee for service.

A UC Riverside study last year ago found that tiered rates led to an overall reduction in water usage of about 15 percent.

The underlying court case was brought by a taxpayers group in San Juan Capistrano, where the water agency is charging the biggest users about four times more per gallon than the most frugal users are charged.

San Juan Capistrano’s 2010 rate schedule charged customers $2.47 per unit — 748 gallons, or 100 cubic feet — of water in the first tier and up to $9.05 per unit in the fourth. In comparison, Cal Am’s top rate for residential customers is about $45 per 100 cubic feet.

The appeals court also ruled that agencies cannot set different rate structures for different classes of customers, such as residential and commercial. Cal Am’s rate structure provides most commercial users with a discount of about 20 percent, which is among the reasons the Peninsula business community has become a strong political supporter of the water purveyor.

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Drowning Piggy

Water agencies throughout California are paying exceptionally close attention to an upcoming appellate court ruling that could dramatically change the way water bills are computed, potentially ending the tiered rates designed to promote conservation.

Whether the ruling would apply to Monterey Peninsula ratepayers isn’t clear, however, because the court case focuses on government-operated water systems and the Peninsula water purveyor, California American Water, is a private company.

With the majority of Californians served by municipal or special district water systems, state officials would likely scramble to amend either state law or the state Constitution to eliminate the language that led a lower court to strike down tiered rates. One possibility is that the higher water rates for heavy users would be recharacterized as penalties instead of fees, skirting state law that requires government agencies to charge no more than the actual cost of providing services. Los Angeles Times article on the case.

An association of government water agencies says in court papers that tiered rates are critical because they provide strong incentive for customers to conserve and because those paying higher rates are essentially providing the money for future water supply projects. Only one water district, Mesa, in Costa Mesa, has broken with the pack. It says its customers have effectively conserved water through voluntary measures without the need for tiered rates.

The underlying case is the Capistrano Taxpayers Association versus the city of San Juan Capistrano. Orange County Superior Court Judge Gregory Munoz ruled for the taxpayers group in 2013 but the city has maintained its staggered rates pending a decision from the Fourth District Appellate Court in Santa Ana. That court heard arguments in January and is expected to rule shortly.

In San Juan Capistrano, the city created a rate structure that has the heaviest water users paying 366 percent more than the thriftiest customers. The top rate there works out to $9.05 per 100 cubic feet of water. In contrast, Cal Am’s top rate for residential customers is about $45 per 100 cubic feet.

Munoz found that the city had failed to demonstrate that the cost of water in the higher tiers “were proportional to the costs of providing water services to its customers.” In Monterey County, Cal Am has never argued that the tiered rates are tied to any actual costs but are only intended to promote conservation. The higher fees in recent years have sparked numerous complaints about relatively minor leaks or unexplained increases in water usage leading to some homeowners receiving bills in the thousands or tens of thousands of dollars for one month. Cal Am has denied that it profits from the tiered rates.

In the Orange County case, Judge Munoz also ruled that water agencies could not charge different rates for different classes of customers, such as residential users and commercial users. Cal Am’s effective top rate for most commercial users is about 20 percent of the top rate for residences. (Cal Am does have a higher commercial rate but only for customers who aren’t willing to fill out a form saying they conserve water when they can.)

At the center of the litigation is Proposition 218, which state voters approved in 1996 to limit the ability of government agencies to raise taxes or fees. It requires that government fees not exceed the actual costs of service and requires the agencies to obtain voter approval before raising fees or taxes. Proposition 218 is the basis of a recent lawsuit aimed at the Monterey Bay air pollution control district, which allegedly collects fees well in excess of actual costs.

Judge Munoz agreed with the Capistrano taxpayers that that city is collecting a premium not based on any actual costs. In response, the city and an association of government water agencies argue that they are essentially charging big water users for the cost of future water facilities that wouldn’t be needed if they did a better job of conserving. They also argue that the state Constitution mandates water conservation and that tiered rates are the most effective method of achieving that goal.

CALIFORNIA CONSTITUTION ARTICLE 10  WATER

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.

In court filings, the Association of California Water Agencies and the League of California Cities cite fears that if Munoz’s ruling remains intact, water providers would be required to account for the exact cost of water from each source – groundwater, rivers, desalination, wastewater treatment, etc., — and calculate each customer’s bill based on whatever blend the customer is receiving. The water agencies say that would be prohibitively expensive. They also worry that the ruling would affect how they charge customers for certain programs, such as the cost of water recycling programs. As it is, those costs are included in the bills of most customers, even those who don’t receive recycled water or directly benefit from the recycling programs.

The city says that if it can’t  spread the cost of such programs throughout its customer base, the cost to some ratepayers would be excessive. The city says that could actually result in increased rates for everyone because it could eliminate the use of some supplementary water supplies, requiring expansion of the overall water system.

In court papers, the “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.”

Below, attorney Jim Markman explains the impact of Judge Munoz’s ruling to the Brea City Council. Markman is a water specialist who is the city attorney in Brea and who also represents the Marina Coast Water District in its continuing litigation with Cal Am and Monterey County

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