City Releases Legal Memos on Legality of Rate Structure

It has been ten days since Michael Harrington announced he had filed a lawsuit against the city, citing among other reasons that the proposed rate structure violates Proposition 218’s proportionality requirement.  The city has finally responded to some of the allegations raised in the suit.

The city has thus far remained silent on the other contention that the city has failed to pay for its own water use.  Davis Enterprise columnist Bob Dunning most recently cited reporter Tom Sakash in leveling the charge.

Writes Mr. Dunning, citing Mr. Sakash’s news story, “After receiving multiple requests from the media for information about whether the city pays for its own water, a city official admitted this week that it doesn’t.”

The city has yet to comply with a public records request for documents submitted on January 31, but the city’s time has not elapsed on this request.

The city did release a memo from Kelly Salt, an attorney who specializes in Prop 218 law from Best, Best and Krieger, dated February 7, 2013.  The memo addresses two critical questions raised in the lawsuit and elsewhere.

First, “Does the proposed consumption-based fixed rate structure for the City of Davis’ water service fees comply with California Constitution article XIII D, section 6?”

Second, “If a portion of the proposed water service fees are used to fund future capital facilities of the water system, would the fees be considered assessments subject to the ballot protest procedures of California Constitution article XIII D, section 4?”

Kelly Salt concludes, “We believe that the CBFR structure provides with the substantive provisions of [Prop 218].”

She adds, “In fact, it could be argued that when water consumption is priced to capture the costs associated with greater demand, the rates more closely reflect each customer’s proportionate cost of providing water service by ensuring that those who reasonably use water do not pay for costs generated by those who place the most demand on the system.”

She addresses the second question noting, “Imposing water service fees on current property owners to construct the Project or any other capital facilities that will be completed in the future does not result in the City’s water service fees being imposed for a service that is not actually used by, or immediately available to, a property owner and therefore subject to the ballot protest procedures of Article XIII D, section 4. As long as a property is connected to the City’s water system, water service is immediately available to that property.”

The memo goes through the background of the WAC and the WAC recommendation, whereby “the City Council determined it was appropriate to increase the rates for its water service fees and implement the new CBFR rate structure.”

Ms. Salt explains both the fixed distribution charge, which is established based on the size of the water meter, and the variable charge that is the “basis of the cost of providing water.”  She writes, “Together, the rates for the two components of the City’s water service fees are structured to recover the proportionate costs of providing water service to each customer class.”

Beginning January 1, 2015, the city would implement the CBFR structure which “is comprised of three components – a distribution charge, a variable charge, and a supply charge.”

Ms. Salt notes, “Article XIII D, section 6(b) requires that water service fees be proportionate to the cost of providing water service.”

She argues based on a Supreme Court ruling in a case involving the California Farm Bureau. “Proportionality is not measured on an individual basis; it is measured collectively, considering all rate payers. In addition, water service fees may not be imposed for water service unless the water service is actually used by, or immediately available to, the owner of the property subject to the fees.”

She notes, “The court held that in applying these principles, public agencies are allowed to employ a flexible assessment of proportionality within a range of reasonableness in calculating the amount and distribution of its fees.”

Indeed, the court in a lawsuit involving the cities of Dublin and Alameda county ruled, “[T]he record need only demonstrate a reasonable relationship between the fees to be charged and the estimated cost of the service or program.”

Kelly Salt notes, “Typically, the underlying goals of a water conservation program are to conserve and manage limited water resources and delay the need for capacity expansion projects by reducing demand peaks. Conservation-based water rates further these goals and allocate the proper revenue requirements of a public agency to representative customers based on cost-causation principles such as those described in the American Water Works Association’s (“AWWA”) Manual M1 “Principles of Water Rates fees and Charges” (the “M1 Manual”).”

In short, she writes, “The customers who create a cost burden should pay for it.”

Ms. Salt continues: “Conservation-based water rates reasonably reflect the proportionate cost of providing water service attributable to those parcels that use the most water and place the greatest demands on the system. Those costs include both direct costs and indirect costs of regulating and promoting conservation, and managing a limited public resource – e.g., the costs of purchasing, producing, delivering, and replenishing water, and obtaining additional or supplemental sources of water such as the Project – in the interest of the people and for the public welfare.”

“The CBFR structure is a conservation-based water rate structure,” she argues. “However, it has none of the characteristics that caused the Palmdale court to conclude that the water district’s rates did not comply with the substantive provisions of Article XIII D, section 6(b).”

Palmdale Water District failed, she argues, because, “The City of Palmdale, an irrigation customer, challenged the rates, claiming irrigation customer rates exceeded the proportional cost of providing water service in violation of Article XIII D, section 6(b).”

Where they failed in the court’s view is that “the district made no showing that the district’s cost of delivering water service to irrigation customers is proportionately higher than its cost of delivering water service to residential and commercial customers and, therefore, irrigation customers should not be bumped into Tiers 2 through 5 sooner than other customer classes.”

She argues that is not the case in CBFR.

Under CBFR, all customers are treated the same and the rates “are based on annual revenue requirements to meet projected demand. Projected demand is based on a water customer’s actual water use during the prior peak demand period.”

She writes, “Each customer will be aware of his or her respective prior year’s average monthly water usage, and, applying the rates, be able to project the amount of the water service fees that will be imposed on him or her. A customer can then choose to stay within that same average monthly water usage to project his or her future year’s water use, or assume some personal conservation and use a lower amount, thereby reducing his or her water service fees.”

Kelly Salt references the complaint prepared by Michael Harrington on behalf of the Yolo Ratepayers for Affordable Public Utility Services and John R. Munn.

“In the complaint, Mr. Harrington alleges that the proposed water service fees violate Article XIII D, section 6(b)(4). Specifically, Mr. Harrington alleges that since a portion of the proposed water service fees would be used to fund the Project, and the Project will not be used by, or immediately available to some of the current property owners within the City, the proposed water service fees are assessments,” she writes.

However, Ms. Salt argues, “Mr. Harrington… misconstrues this constitutional provision.”

Kelly Salt here notes the appellate Court decision in Paland and their interpretation of the “immediately available” clause in Prop 218.

The court argued, “[a]s long as the agency has provided the necessary service connections at the charged parcel and it is only the unilateral act of the property owner (either in requesting termination of service or failing to pay for service) that causes the service not to be actually used, the service is “immediately available” and a charge for the service is a fee rather than an assessment (assuming the other substantive requirements of a fee are satisfied).”

Of significance, the Paland court recognized that “[c]ommon sense dictates that continuous maintenance and operation of the water and sewer systems is necessary to keep those systems immediately available.”

She argues, “The City must project its expected capital and operating expenses for the coming fiscal years, and adjust its rates accordingly to ensure revenues will meet projected expenses.”

Citing a case involving the Howard Jarvis Taxpayers and city of Roseville, she notes the court ruled, “[W]hat it costs to provide [water] services includes all the required costs of providing service, short-term and long-term, including operation, maintenance, financial, and capital expenditures. The key is that the revenues derived from the fee or charge are required to provide the service, and may be used only for the service.”

Ms. Salt argues, “To do otherwise would mean that there are insufficient funds to operate and maintain the remainder of the system or that ratepayers would be subject to significant periodic rate hikes as funds are required to pay for construction costs.”

“At best, the City may issue bonded indebtedness in advance of the construction of water system facilities, but the rates for the water service fees by necessity will have to be structured in a manner that allows the City to pay debt service on the bonds over an extended period time and in advance of the completion of the facilities,” Kelly Salt writes. “To paraphrase the Paland court, a contrary conclusion would lead to an absurd result whereby an individual property owner could unilaterally preclude collection of his or her pro rata obligation for the construction of facilities necessary to provide water service absent an owner vote.”

—David M. Greenwald reporting