1. Rutan & Tucker, LLP 611 Anton Blvd., Suite 1400, Costa Mesa, CA 92626 | 714-641-5100 | www.rutan.com UNCONSTITUTIONAL CONSERVATION? Conservation Rate Structures and the Prop 218 Conundrum Joel Kuperberg Urban Water Institute Spring 2014 Water Conference Current Legal Developments In Ratemaking Panel

2. Rutan & Tucker, LLP 611 Anton Blvd., Suite 1400, Costa Mesa, CA 92626 | 714-641-5100 | www.rutan.com 2

3. Conservation Rate Structure Escalating rate tiers Increasing water use = increasingly higher rates –Incentivize low water use –Penalize higher water use 3 Traditional Volumetric Rate Structure (Postage Stamp) One flat rate for all consumption Neither incentivizes nor penalizes

4. Rutan & Tucker, LLP 611 Anton Blvd., Suite 1400, Costa Mesa, CA 92626 | 714-641-5100 | www.rutan.com Brydon v. East Bay M.U.D., 24 Cal. App.4th 178 (1994) Rejected Prop. 13 “special tax” challenge to conservation rate structure. “[T]he inclining block rate structure is one small and modest component of a well-conceived and eminently reasonable drought management program.” 4

5. Rutan & Tucker, LLP 611 Anton Blvd., Suite 1400, Costa Mesa, CA 92626 | 714-641-5100 | www.rutan.com Proposition 218 5 June 1996 Initiative Measure Adds California Constitution, Articles XIIIC, XIIID New procedural requirements and substantive restrictions on: Taxes Assessments “Property-Related” fees

6. Rutan & Tucker, LLP 611 Anton Blvd., Suite 1400, Costa Mesa, CA 92626 | 714-641-5100 | www.rutan.com “Property-Related” Fees under Prop. 218 6 Art. 13D, §§2(e), (f): A fee or charge: Imposed by any agency Upon: –A parcel; or –A person as an incident of property ownership For a public service having a direct relationship to property ownership. Art. 13D, §6: “Except for fees or charges for sewer, water, and refuse services, no property related fee shall be imposed or increased unless and until that fee or charge... [is approved at an election]”

7. Rutan & Tucker, LLP 611 Anton Blvd., Suite 1400, Costa Mesa, CA 92626 | 714-641-5100 | www.rutan.com Evolution of Judicial View of Water Rates and Proposition 218 Howard Jarvis Taxpayers Ass’n v. City of Los Angeles, 85 Cal.App.4th 79 (2000): Volumetric water rates (rates for metered water use) relate to use rather than property, and are not “property related” fees subject to Prop. 218. 7 Bighorn-Desert View Water Agency v. Verjil, 39 Cal.4th 205 (2006): Volumetric rates for metered water service are “property related” fees subject to Prop. 218

8. Rutan & Tucker, LLP 611 Anton Blvd., Suite 1400, Costa Mesa, CA 92626 | 714-641-5100 | www.rutan.com Article XIIID, sec. 6(b): Requirements for Existing, New or Increased Property- Related Fees and Charges A fee or charge shall not be extended, imposed, or increased by any agency unless it meets all of the following requirements: (1)Revenues derived from the fee or charge shall not exceed the funds required to provide the property related service. (2)Revenues derived from the fee or charge shall not be used for any purpose other than that for which the fee or charge was imposed. (3)The amount of a fee or charge imposed upon any parcel or person as an incident of property ownership shall not exceed the proportional cost of the service attributable to the parcel. (4)No fee or charge may be imposed for a service unless that service is actually used by, or immediately available to, the owner of the property in question. Fees or charges based on potential or future use of a service are not permitted. Standby charges, whether characterized as charges or assessments, shall be classified as assessments and shall not be imposed without compliance with Section 4. (5)Ne fee or charge may be imposed for general governmental services including, but not limited to, police, fire, ambulance or library services, where the service is available to the public at large in substantially the same manner as it is to property owners. 8

9. Rutan & Tucker, LLP 611 Anton Blvd., Suite 1400, Costa Mesa, CA 92626 | 714-641-5100 | www.rutan.com California Constitution, Art. X, 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.” 9

10. Rutan & Tucker, LLP 611 Anton Blvd., Suite 1400, Costa Mesa, CA 92626 | 714-641-5100 | www.rutan.com City of Palmdale v. Palmdale Water District, 198 Cal.App.4th 962 (2011) SFR/MFRCommercialIrrigation Tier 2 ($2.50/unit)100-125%100-130%0-110% Tier 3 ($3.20/unit)125-150%130-160%110-120% Tier 4 ($4.16/unit)150-175%160-190%120-130% Tier 5 ($5.03/unit)Above 175%Above 190%Above 140% 10 Palmdale Water District’s Tiered Rate Structure

11. Rutan & Tucker, LLP 611 Anton Blvd., Suite 1400, Costa Mesa, CA 92626 | 714-641-5100 | www.rutan.com City of Palmdale v. Palmdale Water District, 198 Cal.App.4th 962 (2011) “Article X, section 2 is not at odds with Article XIII-D so long as, for example, conservation is attained in a manner that “shall not exceed the proportional cost to the service attributable to the parcel... Yet, a review of the tier structural alone establishes that irrigation customers such as the City are charged disproportionate rates reaching Tier 5 ($5.03/unit) rates at 130 percent of their budgeted allocation as compared to others who do not reach such high rates until they exceed 175 percent (SFR) and 190 percent (Commercial) without any showing by PWD of a corresponding disparity in the cost of providing water to these customers at such levels.” 11

12. Rutan & Tucker, LLP 611 Anton Blvd., Suite 1400, Costa Mesa, CA 92626 | 714-641-5100 | www.rutan.com HYPOTHETICAL WATER RATE STRUCTURES DemandSupply Costs Customers: 100Groundwater: 600 units @ $5/unit Total Use: 1000Imported water: 400 units @ $10/unit Conservation Goal: 20% reduction (8 units/customer) 12 Assumptions Blended (Postage Stamp) Tier 1:6 units GW @ $5/unit =$30 4 units of imported water @ $10/unit =$40 $70 $70/10 units = $7/unit (actual cost) Dual Source: Conservation Tiers Tier 1:6 units GW @ $5/unit = $30 2 units import @ $10/unit= $20 $50 $50/8 units= $6.25/unit (actual cost) Tier 2:Remainder supplied by imported water @ $10/unit (actual cost) Single Source: Conservation Tiers (Assumes no GW available) Tier 1: 8 units imported at $10/unit (actual cost) Tier 2: Remainder supplied by imported water at $15/unit (actual cost = $10/unit)