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My water district is using EPA's ETo (evapotranspiration) concept to set water budgets for retail billing. ETo is higher during hot and dry months. My water district is multiplying ETo by landscape area to yield a water budget. Stay under budget, and water is $3.50/HCF. Go over and it's $5.22/HCF. Go 2X over and it's $10.22/HCF.

I see two possible legal issues with this approach:

  1. It seems to violate Proposition 218's requirement that retail costs must be based on "attributable cost" because it creates an inverse relationship between retail and wholesale pricing. Since ETo is lower during conditions that tend to increase wholesale supply, and my district's billing method effectively raises retail prices at those times, retail prices are higher when wholesale prices are lower.
  2. It seems to violate Contract Law's notion of agreement between parties, since ETo data is not published in advance of billing.

Can my water district's billing practices still be legal?

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Can my water district's billing practices still be legal?

They are likely to be legal, but it isn't entirely clear.

Contract Law

ETo data is not published in advance of billing, which seems to violate Contract Law's notion of agreement between parties.

A contract can set forth a formula for determining a price, rather than a particular dollar amount.

For example, my utility company charges me a rate for electricity and natural gas that is based upon the market price of those commodities that it has to pay (although since my utility is a regulated utility, it has to get approval from a government agency each time it does so to confirm that it is really charging the market rate).

Similarly, in the construction industry, and in government contracts, "cost plus" contracts that charge based upon whatever is spent to get the job done plus a market up by the general contractor, are not uncommon.

Proposition 218

The Proposition 218 analysis is trickier. This is clearly not a tax or an assessment. So the threshold question is whether this is a Property Related Fee. In December of 2018 a legislative analysis stated that:

A fee is a charge imposed on an individual or business for a service or facility provided directly to an individual or business. Local governments charge fees for a wide range of purposes, from park entry fees to building plan check fees. The amount of the fee may not exceed the cost of government to provide the service.

Proposition 218 restricts property-related fees, defined as fees imposed "as an incident of property ownership." At this time, there is no consensus as to which fees meet this definition. The drafters of Proposition 218 indicate that it was their intent to include most fees commonly collected on monthly bills to property owners, such as those for water delivery, garbage service, sewer service, and storm water management fees. Other analysts of Proposition 218 contend that fees that vary by level of service (for example, a fee for metered water usage) should not be considered a property-related fee, because it is based on service usage, rather than property ownership. Because Proposition 218 does not restrict nonproperty-related fees, the definition of this term will be an important and sensitive issue for the Legislature and courts.

But, the California Supreme Court clarified this in July of 2006 in the case of Bighorn-Desert View Water Agency v. Verjil, ruling that metered rates for consumption of water are “property-related fees” subject to Proposition 218.

So, assuming that your Water District is a governmental agency and not just a private company like a Ditch Company from which you receive privately owned water because you have shares in it, Proposition 218 should apply. This leads to the second question:

Does the amount of the fee exceed the cost of government to provide the service?

This is a non-trivial question with lots of ambiguities associated with it, that are fundamentally accounting issues, regarding the level of generality at which you analyze it.

At the most general level, the water district clearly isn't allowed to collect more in fees in the aggregate than is necessary for it to break even from purchasing the water from someone and conducting its operations (assuming that it is a governmental entity).

But, assuming that this threshold is met, the question is then how much discretion the water district has to allocate its costs, many of which are fixed costs that benefit all of the people in the water district, to particular users. It sounds from the question as if some of its costs involve purchasing water from a wholesaler, and some involve things like distributing that water to individual customers, metering usage, invoicing customers and collecting payments.

Also, another question of generality is over what time period costs have to match services. At a fairly broad level of generality, perhaps it is permissible to match fees to cost on an annual basis. Certainly, the matching doesn't have to be any more specific than for an individual billing cycle, but it isn't obvious that this much precision in timing is required.

Almost certainly, the water district is entitled to some deference in how it decides to allocate costs to services when there is more than one reasonable way to do so.

Very likely, the water district evaluated its billing policy with its municipal attorney in light of Proposition 218 when it adopted this system and obtained an opinion of counsel that its plan was compliant. Indeed, it probably has covenants in its municipal bond offerings that require it to do so.

Therefore, it is very unlikely that the water district's billing policy blatantly and unambiguously violates Proposition 218, even though it make be pushing the envelope with a billing scheme that isn't clearly allowed or clearly forbidden by court precedents that are factually similar.

If that is the case, you might find a lawyer willing to bring a class action lawsuit to test the validity of the billing system, but it would likely be a long and difficult case with an uncertain outcome that the water district is more likely to win than you are, although it still might be a technical violation.

Given the small stakes you have in the question with your own relatively small water bill, and the high stakes that the water district has in justifying its billing system for all of its customers, it is hard to see how this would be an economic battle for you to fight.

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  • Thank you, this makes sense. I guess the fixed cost makes it tricky, as you point out. After all, the district has to be able to make money when fewer people are irrigating. But I thought there was some recent prop 218 case (in response to the 2016 drought rate hikes) that successfully argued that there were limits in how the fixed costs could be concentrated to specific users -- specifically related to using rate tiers for that purpose. (In this particular case, it wasn't a class action but a self-funded individual making a point. As you say, not an economic battle) – personal_cloud Feb 26 at 8:52
  • @personal_cloud I certainly don't claim to be an expert on Proposition 218 case law. I certainly haven't reviewed all of the relevant case law. It could be that some of the issues I have posed as open ended questions have more definitive resolutions. But it is also true that someone almost surely did look at all of that before the new rate system was imposed and that any new case law was not so blatantly clear that it made it an open and shut case, or the Water District would very likely have changed its policy because trade journals keep them up to date on those developments. – ohwilleke Feb 26 at 9:00

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