As CalWatchdog.com reported last month, “the 4^th District Court of Appeal struck down San Juan Capistrano’s tiered water fee plan because it violated Prop. 218’s restriction that any fee must be for the cost of service and no more. The court found that by creating a 4-tier fee plan that charged $2.47 per unit for first tier water usage up to $9.05 a unit for greater usage the plan was not based on the cost of the water service.”

That has Golden State water agencies struggling to figure out their next steps. “The vast majority of urban water agencies in California use some form of tiered rates, which are seen as a key conservation tool as communities work to comply with Gov. Jerry Brown’s order to slash water use by 25 percent over the next year,” the Los Angeles Times observed.

“Long-time rate consultant Sanjay Gaur said aggressively increasing rates — especially those that charge more than $10 per unit — could raise red flags. He estimated that at least a third of the state’s water suppliers would need to ‘do a better job explaining their tiered rates and the rationality behind them.'”

Early this month, regulators had moved to adopt dramatic new tiered rates meant to reflect Gov. Jerry Brown’s order to slash municipal consumption. The State Water Resources Control Board decided to require “up to 36 percent reductions from the biggest water users,” as BuzzFeed reported. “The cities in the highest tier were singled out after failing to make significant cuts over the previous year.”

Uneven impact

Not all water agencies with tiered pricing found themselves in a crisis situation, however. The court’s ruling only applied to punitive tiered pricing. Tiers based around the relative cost and availability of providing water, by contrast, were allowed to continue.

Regional reputations

In a Field Poll conducted this February, the Sacramento Bee noted, “pluralities of voters in every region in California said the state should be allowed to bypass environmental regulations protecting fish in the San Francisco Bay and Sacramento-San Joaquin River Delta — except one. In the San Francisco Bay Area, nearly two-thirds of voters disagreed.”

Visions have persisted in Northern Californians of luxury, vanity and water waste in the Southland. But despite the frequent stories of outsized consumption by celebrities and golf courses, recent data has painted a different picture. “Southern California has made huge strides in conservation,” according to the Bee. “Regional water agencies have invested in storage and water recycling. Total water consumption in the region has remained flat over the past 15 years, despite population growth.”

Celeste Cantú, former director of the State Water Resources Control Board, said that “Southern California really did get the message. We’ve added millions of people, and our potable water is the same.”

Detailing the plan, MarketWatch reported that “Angelenos must save another 16 percent for the year ahead, the water board said,” despite saving over 9 billion gallons, or 7 percent, over the previous year:

“By comparison, San Francisco lowered its water usage (22,351 gallons per resident) between June 2014 and February 2015 by more than 1.6 billion gallons, a saving of 8 percent from the same period a year earlier. As such it has just an 8 percent target water reduction for the 2015-2016 period, the state said.

“San Diego, which depends on water imported from outside of the city for 90 percent of its usage, must cut back on demand in the next year by 16 percent, the state water board said.”

Meanwhile, the 4th District Court of Appeal in Orange County sided with a challenge to the constitutionality of San Juan Capistrano’s tiered water pricing system. As the San Jose Mercury News reported, the court held that tiered rates “violated voter-approved Proposition 218, which prohibits government agencies from charging more for a service than it costs to provide it.”

A blow to Brown

For Gov. Jerry Brown, the ruling was an instant headache. He had recently issued an executive order, The Los Angeles Times noted, “directing water agencies to develop rate structures that use price signals to force conservation.”

In a prepared statement issued by the governor’s office in the wake of the ruling, Brown did not shy away from making his frustration plain. “The practical effect of the court’s decision is to put a straitjacket on local government at a time when maximum flexibility is needed,” he said, invoking a bottom-up view of political efficacy most often associated with Republicans. “My policy is and will continue to be: Employ every method possible to ensure water is conserved across California.”

Making waves

As CalWatchdog.com previously observed, the sweeping ramifications of the case put regulators and cities on edge. Providers could fall back on technicalities to make increased consumption more costly — charging more for water drawn from certain areas, for instance — the bureaucratic challenge involved in finding and implementing workarounds could be substantial. According to the Times, experts surmised that between two-thirds and four-fifths of water agencies in California charged tiered rates for usage.

Especially in Southern California, the ruling has thrown a monkeywrench into major plans for an overhaul of the tier system. “The Los Angeles Department of Water and Power currently uses a two-tier rate structure, but agency officials have said they are preparing to roll out a revised system that would employ four tiers and that would make high water use even more costly than it is now,” the Times reported.

Tim Quinn, executive director of the Association of California Water Agencies, told the Sacramento Bee that the ruling was currently under legal review by attorneys. But plaintiffs’ attorney Benjamin Benumof told the Bee that, on their view, government could effectively promote conservation by, for instance, increasing rebates for low-flow appliances and devices.

A turn to penalties

An approach utilized in Santa Cruz offered perhaps the quickest option for municipalities straining to meet new standards without tiered rate pricing. There, the Mercury News reported, the city’s recently reinstated mandatory rationing program hits high users with a flat $50 fee per “unit” of consumption in excess of 11 units:

“That fee, which sent some water guzzlers’ bills skyrocketing, will not be affected by Monday’s court ruling, however, said Rosemary Menard, Santa Cruz’s water director, because it is clearly labeled a “penalty” in the city ordinance, and is not used to pay for daily operations of the water system.” 

The case involved is Capistrano Taxpayers v. City of San Juan Capistrano.

In a split decision, the Fourth District State Court of Appeals ruled that tiered water rates to spur conservation in the city of San Juan Capistrano and statewide “must be based on usage, not budgets.”  But the court also ruled that the added cost of a water recycling plant can be tacked onto residential customers water bills, even though residences are “not plumbed to receive non-potable recycled water.”

Thus, the court evenly ruled both for higher water rates for all customers for recycled water; and against charging higher water rates only on big water users, which are not based on the actual cost of service for that price tier.

Nonetheless, the ruling caused a firestorm of news headlines that contradicted the judges’ ruling as a “blow to water conservation,” as ruling that tiered water rates were “unconstitutional” and as favoring “big users.”

Gov. Brown called the ruling a “straightjacket” on conservation efforts. Kelly Salt, an attorney with the water law firm of Best Best and Krieger, representing the State Association of Counties, League of California Cities and Association of California Water Agencies, said, “It is unfortunate that this decision came down during the worst drought in California history.” Even Tim Quinn, head of the California Association of Water Agencies, called the decision a potentially major blow to water conservation efforts. But it was unclear if their reactions were pointed at the court ruling or Proposition 218.

Judge: Tiered pricing allowed, but based on actual costs

Acting Judge P.J. Bedsworth made it very clear that the court’s decision did not rule out tiered water rates to bring about conservation:

“…one of the benefits of tiered rates is that it is reasonable to assume people will not waste water as its price goes up.  Our courts have made it clear they interpret the Constitution to allow tiered pricing; but the voters have made it clear they want it done in a particular way” (p. 21-22).

In accordance with Prop. 218, the particular way the voters wanted it was to base each rate tier on the cost of service for the tier. The court ruled:

“…we do hold that above-cost-of-service pricing for tiers of water service is not allowed by Proposition 218 and in this case, City Water did not carry its burden of proving its higher tiers reflected the cost of service. In fact, it has practically admitted those tiers don’t reflect cost of service” (p. 28).

The city did not try to calculate the extra cost of providing water for each tier and used revenues from the top tiers to subsidize below cost rates for the bottom tier.

Benjamin Benumof, who filed the lawsuit for the taxpayers, said there is no conflict between the court’s ruling and water conservation. “The court simply invalidated ‘arbitrary tiered rates,’” said Benumof.

Brown looking for water rates to finance water tunnels

Jon Coupal of the Howard Jarvis Taxpayer’s Association stated in an email:

“Methinks Governor Brown doth protesteth too loud, to paraphrase Bill Shakespeare. First, the court did not reject out of hand tier water rates. However, the court did make it clear that water rates must be based on the cost of service. That is as it should be. The reality is that water districts and cities have many tools (fines, penalties, termination of service, voter approved special tax) to enforce conservation.”

Gov. Brown and the California Association of Water Agencies are still looking for a financing mechanism for its controversial Delta water tunnel project. State water contractors will pay the largest share – 68 percent – of the bill for the tunnels, which would be passed on to water rate payers. The Association of California Water Agencies filed a “Friend of the Court” brief on behalf of the city in the case. The cost of the water tunnels, without wetlands restoration, which has been dropped, would be $42 billion.

Brown’s Delta Water Tunnels Project has not been making much progress because of apparent difficulties in its financing. In December 2014, Brown dropped the huge pumps from the Delta water tunnel plan in favor of a gravity flow system, which is how the Sacramento Delta operates today. And a week ago, Brown dropped the Delta Restoration guarantees from the project as well.

An appellate court decision that would have invalidated the cost of local water service test for water rates from Prop. 218 would have made financing large state water infrastructure projects through local water rates a viable option.

The 4^th District Court of Appeal struck down San Juan Capistrano’s tiered water fee plan because it violated Prop. 218’s restriction that any fee must be for the cost of service and no more. The court found that by creating a 4-tier fee plan that charged $2.47 per unit for first tier water usage up to $9.05 a unit for greater usage the plan was not based on the cost of the water service.

Paying for the service provided

The goal of Prop. 218 was explained in a Legislative Analyst’s Office paper written to help clarify the measure after it had become law:

In general, the intent of Proposition 218 is to ensure that all taxes and most charges on property owners are subject to voter approval. In addition, Proposition 218 seeks to curb some perceived abuses in the use of assessments and property-related fees, specifically the use of these revenue-raising tools to pay for general governmental services rather than property-related services.

The Analyst’s paper also noted under Prop. 218, “The amount of the fee may not exceed the cost of government to provide the service.”

In other words, some governments went beyond paying for the service provided. The local governments or agencies tacked on increased amounts beyond what was necessary to provide some services such as water and sewer charges. If the local governments wanted additional revenue they should have presented a tax measure to voters for approval. To avoid tax votes, many governments turned to revenue raising devices such as assessments and fees.

The unusual, extensive and improper use of assessment districts and fees employed by local governments prior Prop. 218 passing in November 1996 explains the measure’s solid support from voters on Election Day, 56.5 percent Yes to 43.5 percent No.

Examples of misuse

To get a sense of how the assessments were abused, some well-reported examples of misused assessments were included in the pro-218 argument in the official state ballot booklet:

(O)ne lawyer working with politicians wrote, assessments ”are now limited only by the limits of human imagination.”

How imaginative can the politicians be with assessments? Here are a few examples among thousands:

• A view tax in Southern California – the better the view of the ocean you have the more you pay.
• In Los Angeles, a proposal for assessments for a $2 million scoreboard and a $6 million equestrian center to be paid for by property owners.
• In Northern California, taxpayers 27 miles away from a park are assessed because their property supposedly benefits from that park.
• In the Central Valley, homeowners are assessed to refurbish a college football field.

It was the misuse exemplified in these property assessment examples that prompted the ballot measure passed by the voters. Prop. 218 did not make provisions for penalties, which in essence, the tiered tax water rates are.

The court, in its ruling, did not reject the use of tiered water rates and this case will not prevent conservation if the rate system is rewritten to satisfy the law. As Jon Coupal of the Howard Jarvis Taxpayers Association, the group that sponsored Prop. 218, wrote, “Water districts can restrict use through fines and penalties which they already do. Moreover, virtually all water – particularly in Southern California – is metered. Allotments can be fixed with hard caps on use with stiff penalties for use above allotments. A water district even has the power to terminate service. … The reality is that water districts have many tools in their arsenal of legal options to enforce conservation.”

By not adhering to the principle of fees-for-service the court said the water tiered plan violated Proposition 218.

Follow Joel Fox on Twitter @1JoelFox1

It must sound crazy in the middle of an epic California drought to say empirical studies show raising water rates to spur water conservation is not likely to result in water conservation.

But a study by CalWatchdog.com of comparable water rates in Orange County indicates tiered water rates do not clearly result in demonstrably lower water usage. Similar studies in other states show the same thing.

The prevailing notion by water experts is that raising water rates increases conservation. For example, the Pacific Institute is dedicated to “sustainable communities.” A recent Need to Know fact sheet, made in a partnership with the Alliance for Water Efficiency, explained:

“Conservation pricing provides a price signal to customers to use water efficiently, and can be achieved through a variety of volumetric rate structures,” including “Tiered rates in which the volumetric rate increases as the quantity used increases.”

Tiered rates increase the cost of water with higher usage.

Higher rates — higher usage

A recent study of long-term water rates, “Urban Water Demand and Water Rates Structure Over Decades,” of the huge Edwards Aquifer in Texas, found charging more for water usage ironically resulted in higher water use over several decades:

“The adoption of water pricing structures alleged to promote water conservation (e.g., increasing block rates) does not lead to expected results as in our sample (13,447 observations) consumption increased by 5-6 percent (significant at the 1 percent level) after the change occurred… . The “more water conserving” … exert(s) a counterproductive effect and correspond(s) with higher average daily water consumption.”

Orange County

Different water rate methods in Orange County, Calif. also indicate that tiered water rates do not produce greater water conservation.

Let’s look at water rates and usage in three cities in Orange County with similar coastal climates: Tustin, Costa Mesa and Huntington Beach.

                    Comparison Water Usage by City: Tiered and Flat Water Rates

                                 Ranked by Water Use Per Person Per Day

Tustin, with tiered rates, uses 115 gallons of water per person per day.

By contrast, the Mesa Water District (Costa Mesa) and Huntington Beach, with flat water rates, use 95 and 88 gallons per person per day, respectively.

Lower water use should result in a higher proportion of apartment units (which typically use less water).

Higher water usage should result from a higher percentage of cheap groundwater used (lower prices may induce higher use).

And higher water usage should result from a higher number of persons served per water meter hookup (from master metered apartment buildings).

Yet, considering all these factors, there is no clear evidence that tiered water rates conserve water.

Service or commodity?

At the core of the question of whether pegging higher water rates to greater use saves water is whether water is a service or a scarce commodity.

Those water districts that use punitive tiered water rates justify their higher rates by marketing their water-rate policy as bringing greater water conservation of a scarce commodity. Conservation is used as a marketing strategy to raise water rates, not necessarily as a real way to save water. A study by the UCLA Anderson School of Management in 2010 found that water conservation was due to social norms, not water rates.

Conversely, those water districts that use flat water rates tend to see themselves as providing a basic service at the lowest cost possible.