New legislative developments for a post-Coziahr world.
The landscape for water rate setting in California is quickly evolving, and public agencies face growing challenges adjusting to new and complex standards when establishing or increasing water fees and charges. For example, in Coziahr v. Otay Water District, the San Diego Court of Appeal recently struck down Otay Water District’s tiered water rates, suggesting increased scrutiny on evidence supporting tiered water rates, and further ruled that substantial refunds are available in a Proposition 218 case. The Riverside Court of Appeal is set to hear a similar case concerning San Diego’s water rates.
These cases, in addition to other recent and pending opinions, are part of a growing universe of rate cases that continue evolve the rate-setting environment for public agencies in California. Partly in response to these challenges, Governor Newsom recently signed three new bills governing rate-setting under Proposition 218. The laws come at a critical time to bolster the ability of public agencies to establish and defend vital revenue streams for property-related services.
BBK will host a webinar series titled “The Shifting Landscape of Water Rate Setting – Proposition 218 Compliance after Coziahr” in the month of November to dive more deeply into the implications of these developments.
In the meantime, below is a brief summary of the new laws that serves as an important reference for rate-setting entities.
AB 1827 – Recovering Incremental Costs for Water Use: Proposition 218 prohibits water providers from imposing fees for water service that exceed the proportional cost of service to a parcel. Courts interpret this restriction to allow public agencies to allocate incremental costs associated with high water use to tiered water rates or fixed charges, provided such rate structures are supported by evidence. AB 1827 codifies this authority, providing specifically that agencies can consider the higher water usage demand of parcels, maximum potential water use, and projected peak water usage to allocate such costs. Public agencies must continue to justify these incremental costs with evidence of higher usage and increased burden.
AB 2257 – Administrative Exhaustion Procedure: California law requires that a litigant first exhaust administrative remedies prior to suing a public agency. However, California courts have previously held that Proposition 218’s notice and public hearing requirements are not themselves an adequate remedy, such that a litigant is not required to object during the notice and public hearing process in order to satisfy exhaustion requirements. AB 2257 incorporates these lessons by establishing an independent administrative remedy that must be exhausted prior to any Proposition 218 litigation.
AB 2257’s protections only extend to agencies that choose to meet certain specified requirements and procedures, including:
- The agency must make the proposed rates available at least 45 days prior to the deadline for a property owner to submit objections, and provide notice of the administrative remedy procedure in the public hearing notice.
- The agency must post evidence supporting the rates on the agency’s website, and mail it to a property owner upon request.
- The agency must provide property owners with a minimum of 45 days in which to submit a written objection alleging noncompliance with Proposition 218.
- The agency must respond in writing to each written objection prior to the close of the public hearing during which the agency considers adopting the fee or assessment in question.
If an agency complies with the requirements of AB 2257, a potential litigant may only bring litigation after timely submission of a written objection. Further, AB 2257 limits any litigation to the administrative record of the proceedings, which avoids costly discovery and the addition of extra-record evidence.
SB 1072 – Remedies: Proposition 218 does not specify a refund procedure in the event of a violation. However, California courts have previously found that a litigant can obtain a refund for amounts paid in violation of Proposition 218. When a refund is awarded, agencies must generally pass this cost through to all rate payers as part of the agency’s cost of service.
SB 1072 seeks to rectify the pass-through cost by providing that an agency must instead credit ratepayers in the amount attributable to the Proposition 218 violation at any subsequent adoption of rates. Thereby reducing the agency’s revenue requirement and the amount collected from ratepayers. SB 1072 applies to water, sewer, and solid waste rates.
The bills described above are important developments that attempt to balance the importance and cost of public utility services with the public’s right to participate in the rate-setting process and challenge property-related fees. For additional information or to discuss how these developments may impact your agency please contact your BBK attorney. Additionally, be sure to register for our webinar series entitled “The Shifting Landscape of Water Rate Setting – Proposition 218 Compliance After Coziahr” for a deeper dive on these bills with industry leaders.
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