Newhall County Water District v. Castaic Lake Water Agency

Filed 1/19/16
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION EIGHT
NEWHALL COUNTY WATER B257964
DISTRICT,
(Los Angeles County
Plaintiff and Respondent, Super. Ct. No. BS142690)
v.
CASTAIC LAKE WATER AGENCY et
al.,
Defendants and Appellants.
APPEAL from a judgment of the Superior Court for the County of Los Angeles.
James C. Chalfant, Judge. Affirmed.
Best Best & Krieger, Jeffrey V. Dunn, and Kimberly E. Hood for Defendants and
Appellants.
Colantuono, Highsmith & Whatley, Michael G. Colantuono, David J. Ruderman,
Jon R. di Cristina; Lagerlof, Senecal, Gosney & Kruse and Thomas S. Bunn III for
Plaintiff and Respondent.
____________________________________
SUMMARY
Plaintiff Newhall County Water District (Newhall), a retail water purveyor,
challenged a wholesale water rate increase adopted in February 2013 by the board of
directors of defendant Castaic Lake Water Agency (the Agency), a government entity
responsible for providing imported water to the four retail water purveyors in the Santa
Clarita Valley. The trial court found the Agency’s rates violated article XIII C of the
California Constitution (Proposition 26). Proposition 26 defines any local government
levy, charge or exaction as a tax requiring voter approval, unless (as relevant here) it is
imposed “for a specific government service or product provided directly to the payor that
is not provided to those not charged, and which does not exceed the reasonable costs to
the local government of providing the service or product.” (Cal. Const., art. XIII C, § 1,
subd. (e)(2).)1
The challenged rates did not comply with this exception, the trial court concluded,
because the Agency based its wholesale rate for imported water in substantial part on
Newhall’s use of groundwater, which was not supplied by the Agency. Consequently,
the wholesale water cost allocated to Newhall did not, as required, “bear a fair or
reasonable relationship to [Newhall’s] burdens on, or benefits received from, the
[Agency’s] activity.” (Art. XIII C, § 1, subd. (e), final par.)
We affirm the trial court’s judgment.
FACTS
We base our recitation of the facts in substantial part on the trial court’s lucid
descriptions of the background facts and circumstances giving rise to this litigation.
1. The Parties
The Agency is a special district and public agency of the state established in 1962
as a wholesale water agency to provide imported water to the water purveyors in the
Santa Clarita Valley. It is authorized to acquire water and water rights, and to provide,
sell and deliver that water “at wholesale only” for municipal, industrial, domestic and
1 All further references to any “article” are to the California Constitution.
2
other purposes. (Wat. Code Appen., § 103-15.) The Agency supplies imported water,
purchased primarily from the State Water Project, to four retail water purveyors,
including Newhall.
Newhall is also a special district and public agency of the state. Newhall has
served its customers for over 60 years, providing treated potable water to communities
near Santa Clarita, primarily to single family residences. Newhall owns and operates
distribution and transmission mains, reservoirs, booster pump stations, and 11 active
groundwater wells.
Two of the other three retail water purveyors are owned or controlled by the
Agency: Santa Clarita Water Division (owned and operated by the Agency) and
Valencia Water Company (an investor-owned water utility controlled by the Agency
since December 21, 2012). Through these two retailers, the Agency supplies about
83 percent of the water demand in the Santa Clarita Valley. The Agency’s stated vision
is to manage all water sales in the Santa Clarita Valley, both wholesale and retail.
The fourth retailer is Los Angeles County Waterworks District No. 36 (District
36), also a special district and public agency, operated by the County Department of
Public Works. It is the smallest retailer, accounting for less than 2 percent of the total
water demand.
2. Water Sources
The four retailers obtain the water they supply to consumers from two primary
sources, local groundwater and the Agency’s imported water.
The only groundwater source is the Santa Clara River Valley Groundwater Basin,
East Subbasin (the Basin). The Basin is comprised of two aquifer systems, the Alluvium
and the Saugus Formation. This groundwater supply alone cannot sustain the collective
demand of the four retailers. (The Basin’s operational yield is estimated at 37,500 to
55,000 acre-feet per year (AFY) in normal years, while total demand was projected at
72,343 AFY for 2015, and 121,877 AFY in 2050.)
The groundwater basin, so far as the record shows, is in good operating condition,
with no long-term adverse effects from groundwater pumping. Such adverse effects
3
(known as overdraft) could occur if the amount of water extracted from an aquifer were
to exceed the amount of water that recharges the aquifer over an extended period. The
retailers have identified cooperative measures to be taken, if needed, to ensure sustained
use of the aquifer. These include the continued “conjunctive use” of imported
supplemental water and local groundwater supplies, to maximize water supply from the
two sources. Diversity of supply is considered a key element of reliable water service
during dry years as well as normal and wet years.
In 1997, four wells in the Saugus Formation were found to be contaminated with
perchlorate, and in 2002 and 2005, perchlorate was detected in two wells in the
Alluvium. All the wells were owned by the retailers, one of them by Newhall. During
this period, Newhall and the two largest retailers (now owned or controlled by the
Agency) increased their purchases of imported water significantly.
3. Use of Imported Water
Until 1987, Newhall served its customers relying only on its groundwater rights.2
Since 1987, it has supplemented its groundwater supplies with imported water from the
Agency.
The amount of imported water Newhall purchases fluctuates from year to year. In
the years before 1998, Newhall’s water purchases from the Agency averaged 11 percent
of its water demand. During the period of perchlorate contamination (1998-2009), its
imported water purchases increased to an average of 52 percent of its total demand.
Since then, Newhall’s use of imported water dropped to 23 percent, and as of 2012,
2 Newhall has appropriative water rights that arise from California’s first-in-time-
first-in-right allocation of limited groundwater supplies. (See El Dorado Irrigation Dist.
v. State Water Resources Control Board (2006) 142 Cal. App. 4th 937, 961 [“ ‘[T]he
appropriation doctrine confers upon one who actually diverts and uses water the right to
do so provided that the water is used for reasonable and beneficial uses and is surplus to
that used by riparians or earlier appropriators.’ ”]; City of Barstow v. Mojave Water
Agency (2000) 23 Cal. 4th 1224, 1241 [“ ‘As between appropriators, . . . the one first in
time is the first in right, and a prior appropriator is entitled to all the water he needs, up to
the amount he has taken in the past, before a subsequent appropriator may take any
[citation].’ ”].)
4
Newhall received about 25 percent of its total water supply from the Agency. The overall
average since it began to purchase imported water in 1987, Newhall tells us, is
30 percent.
The other retailers, by contrast, rely more heavily on the Agency’s imported water.
Agency-owned Santa Clarita Water Division is required by statute to meet at least half of
its water demand using imported water. (See Wat. Code Appen., § 103-15.1, subd. (d).)
Agency-controlled Valencia Water Company also meets almost half its demand with
imported water.
4. The Agency’s Related Powers and Duties
As noted above, the Agency’s primary source of imported water is the State Water
Project. The Agency purchases that water under a contract with the Department of Water
Resources. The Agency also acquires water under an acquisition agreement with the
Buena Vista Water Storage District and the Rosedale-Rio Bravo Water Storage District,
and other water sources include recycled water and water stored through groundwater
banking agreements. Among the Agency’s powers are the power to “[s]tore and recover
water from groundwater basins” (Wat. Code Appen., § 103-15.2, subd. (b)), and “[t]o
restrict the use of agency water during any emergency caused by drought, or other
threatened or existing water shortage, and to prohibit the wastage of agency water”
(§ 103-15, subd. (k)).
In addition, and as pertinent here, the Agency may “[d]evelop groundwater
management plans within the agency which may include, without limitation,
conservation, overdraft protection plans, and groundwater extraction charge plans . . . .”
(Wat. Code Appen., § 103-15.2, subd. (c).) The Agency has the power to implement
such plans “subject to the rights of property owners and with the approval of the retail
water purveyors and other major extractors of over 100 acre-feet of water per year.”
(Ibid.)
In 2001, the Legislature required the Agency to begin preparation of a
groundwater management plan, and provided for the formation of an advisory council
consisting of representatives from the retail water purveyors and other major extractors.
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(Wat. Code Appen., § 103-15.1, subd. (e)(1)&(2)(A).) The Legislature required the
Agency to “regularly consult with the council regarding all aspects of the proposed
groundwater management plan.” (Id., subd. (e)(2)(A).)
Under this legislative authority, the Agency spearheaded preparation of the 2003
Groundwater Management Plan for the Basin, and more recently the 2010 Santa Clarita
Valley Urban Water Management Plan. These plans were approved by the retailers,
including Newhall.
The 2003 Groundwater Management Plan states the overall management
objectives for the Basin as: (1) development of an integrated surface water, groundwater,
and recycled water supply to meet existing and projected demands for municipal,
agricultural and other water uses; (2) assessment of groundwater basin conditions “to
determine a range of operational yield values that will make use of local groundwater
conjunctively with [State Water Project] and recycled water to avoid groundwater
overdraft”; (3) preservation of groundwater quality; and (4) preservation of interrelated
surface water resources. The 2010 Santa Clarita Valley Urban Water Management Plan,
as the trial court described it, is “an area-wide management planning tool that promotes
active management of urban water demands and efficient water usage by looking to long-
range planning to ensure adequate water supplies to serve existing customers and future
demands . . . .”
5. The Agency’s Wholesale Water Rates
The board of directors of the Agency fixes its water rates, “so far as practicable,
[to] result in revenues that will pay the operating expenses of the agency, . . . provide for
the payment of the cost of water received by the agency under the State Water Plan,
provide for repairs and depreciation of works, provide a reasonable surplus for
improvements, extensions, and enlargements, pay the interest on any bonded debt, and
provide a sinking or other fund for the payment of the principal of that bonded debt . . . .”
(Wat. Code Appen., § 103-24, subd. (a).) The Agency’s operating costs include costs for
management, administration, engineering, maintenance, water quality compliance, water
resources, water treatment operations, storage and recovery programs, and studies.
6
Before the rate changes at issue here, the Agency had a “100 percent variable” rate
structure. That means it charged on a per acre-foot basis for the imported water sold,
known as a “volumetric” rate. Thus, as of January 1, 2012, retailers were charged $487
per acre-foot of imported water, plus a $20 per acre-foot charge for reserve funding.
Because of fluctuations in the demand for imported water (such as during the
perchlorate contamination period), the Agency’s volumetric rates result in fluctuating,
unstable revenues. The Agency engaged consultants to perform a comprehensive
wholesale water rate study, and provide recommendations on rate structure options. The
objective was a rate structure that would provide revenue sufficiency and stability to the
Agency, provide cost equity and certainty to the retailers, and enhance conjunctive use of
the sources of water supply and encourage conservation. As the Agency’s consultants
put it, “[t]wo of the primary objectives of cost of service water rates are to ensure the
utility has sufficient revenue to cover the costs of operating and maintaining the utility in
a manner that will ensure long term sustainability and to ensure that costs are recovered
from customers in a way that reflects the demands they place on the system.”
The general idea was a rate structure with both volumetric and fixed components.
Wholesale rate structures that include both a fixed charge component (usually calculated
to recover all or a portion of the agency’s fixed costs of operating, maintaining and
delivering water) and a volumetric component (generally calculated based on the cost of
purchased water, and sometimes including some of the fixed costs) are common in the
industry.
6. The Challenged Rates
The Agency’s consultants presented several rate structure options. In the end, the
option the Agency chose (the challenged rates) consisted of two components. The first
component is a fixed charge based on each retailer’s three-year rolling average of total
water demand (that is, its demand for the Agency’s imported water and for groundwater
not supplied by the Agency). This fixed charge is calculated by “divid[ing] the Agency’s
total fixed revenue for the applicable fiscal year . . . by the previous three-year average of
total water demand of the applicable Retail Purveyor to arrive at a unit cost per acre
7
foot.” The Agency would recover 80 percent of its costs through the fixed component of
the challenged rates. The second component of the Agency’s rate is a variable charge,
based on a per acre foot charge for imported water.3
The rationale for recovering the Agency’s fixed costs in proportion to the retailers’
total water demand, rather than their demand for imported water, is this (as described in
the consultants’ study):
“This rate structure meets the Agency’s objective of promoting resource
optimization, conjunctive use, and water conservation. Since the fixed cost is allocated
on the basis of each retail purveyor’s total demand, if a retail purveyor conserves water,
then its fixed charge will be reduced. Additionally, allocating the fixed costs based on
total water demand recognizes that imported water is an important standby supply that is
available to all retail purveyors, and is also a necessary supply to meet future water
demand in the region, and that there is a direct nexus between groundwater availability
and imported water use – i.e., it allocates the costs in a manner that bears a fair and
reasonable relationship to the retail purveyors’ burdens on and benefits from the
Agency’s activities in ensuring that there is sufficient water to meet the demands of all of
the retail purveyors and that the supply sources are responsibly managed for the benefits
of all of the retail purveyors.”
The rationale continues: “Moreover, the Agency has taken a leadership role in
maintaining the health of the local groundwater basin by diversifying the Santa Clarita
Valley’s water supply portfolio, as demonstrated in the 2003 Groundwater Management
Plan and in resolving perchlorate contamination of the Saugus Formation aquifer. Thus,
since all retail purveyors benefit from imported water and the Agency’s activities, they
should pay for the reasonable fixed costs of the system in proportion to the demand (i.e.
3 There was also a $20 per acre foot reserve charge to fund the Agency’s operating
reserves, but the Agency reports in its opening brief that it suspended implementation of
that charge as of July 1, 2013, when reserve fund goals were met earlier than anticipated.
8
burdens) they put on the total water supply regardless of how they utilize individual
sources of supply.”
The Agency’s rate study showed that, during the first year of the challenged rates
(starting July 1, 2013), Newhall would experience a 67 percent increase in Agency
charges, while Agency controlled retailers Valencia Water Company and Santa Clarita
Water Division would see reductions of 1.9 percent and 10 percent, respectively. District
36 would have a 0.8 percent increase. The rate study also indicated that, by 2050, the
impact of the challenged rates on Newhall was expected to be less than under the then-
current rate structure, while Valencia Water Company was expected to pay more.
Newhall opposed the challenged rates during the ratemaking process. Its
consultant concluded the proposed structure was not consistent with industry standards;
would provide a nonproportional, cross-subsidization of other retailers; and did not fairly
or reasonably reflect the Agency’s costs to serve Newhall. Newhall contended the rates
violated the California Constitution and other California law. It proposed a rate structure
that would base the Agency’s fixed charge calculation on the annual demand for
imported water placed on the Agency by each of its four customers, using a three-year
rolling average of past water deliveries to each retailer.
In February 2013, the Agency’s board of directors adopted the challenged rates,
effective July 1, 2013.
7. This Litigation
Newhall sought a writ of mandate directing the Agency to rescind the rates, to
refund payments made under protest, to refrain from charging Newhall for its imported
water service “with respect to the volume of groundwater Newhall uses or other services
[the Agency] does not provide Newhall,” and to adopt a new, lawful rate structure.
Newhall contended the rates were not proportionate to Newhall’s benefits from, and
burdens on, the Agency’s service, and were therefore invalid under Proposition 26,
Proposition 13, Government Code section 54999.7, and the common law of utility
ratemaking.
9
The trial court granted Newhall’s petition, finding the rates violated Proposition
26. The court concluded the Agency had no authority to impose rates based on the use of
groundwater that the Agency does not provide, and that conversely, Newhall’s use of its
groundwater rights does not burden the Agency’s system for delivery of imported water.
Thus the rates bore no reasonable relationship to Newhall’s burden on, or benefit
received from, the Agency’s service. The trial court also found the rates violated
Government Code section 54999.7 (providing that a fee for public utility service “shall
not exceed the reasonable cost of providing the public utility service” (Gov. Code,
§ 54999.7, subd. (a)), and violated common law requiring utility charges to be fair,
reasonable and proportionate to benefits received by ratepayers. The court ordered the
Agency to revert to the rates previously in effect until the adoption of new lawful rates,
and ordered it to refund to Newhall the difference between the monies paid under the
challenged rates and the monies that would have been paid under the previous rates.
Judgment was entered on July 28, 2014, and the Agency filed a timely notice of
appeal.
DISCUSSION
The controlling issue in this case is whether the challenged rates are a tax or a fee
under Proposition 26.
1. The Standard of Review
We review de novo the question whether the challenged rates comply with
constitutional requirements. (Griffith v. City of Santa Cruz (2012) 207 Cal. App. 4th 982,
989-990 (Griffith I).) We review the trial court’s resolution of factual conflicts for
substantial evidence. (Morgan v. Imperial Irrigation District (2014) 223 Cal. App. 4th
892, 916.)
2. The Governing Principles
All taxes imposed by any local government are subject to voter approval. (Art.
XIII C, § 2.) Proposition 26, adopted in 2010, expanded the definition of a tax. A “tax”
now includes “any levy, charge, or exaction of any kind imposed by a local government,”
10
with seven exceptions. (Id., § 1, subd. (e).) This case concerns one of those seven
exceptions.
Under Proposition 26, the challenged rates are not a tax, and are not subject to
voter approval, if they are “[a] charge imposed for a specific government service or
product provided directly to the payor that is not provided to those not charged, and
which does not exceed the reasonable costs to the local government of providing the
service or product.” (Art. XIII C, § 1, subd. (e)(2).) The Agency “bears the burden of
proving by a preponderance of the evidence” that its charge “is not a tax, that the amount
is no more than necessary to cover the reasonable costs of the governmental activity, and
that the manner in which those costs are allocated to a payor bear a fair or reasonable
relationship to the payor’s burdens on, or benefits received from, the governmental
activity.” (Id., subd. (e), final par.)
3. This Case
It is undisputed that the Agency’s challenged rates are designed “to recover all of
its fixed costs via a fixed charge,” and not to generate surplus revenue. Indeed, Newhall
recognizes the Agency’s right to impose a fixed water-rate component to recover its fixed
costs. The dispute here is whether the fixed rate component may be based in significant
part on the purchaser’s use of a product – groundwater – not provided by the Agency.
We conclude the Agency cannot, consistent with Proposition 26, base its
wholesale water rates on the retailers’ use of groundwater, because the Agency does not
supply groundwater. Indeed, the Agency does not even have the statutory authority to
regulate groundwater, without the consent of the retailers (and other major groundwater
extractors). As a consequence, basing its water rates on groundwater it does not provide
violates Proposition 26 on two fronts.
First, the rates violate Proposition 26 because the method of allocation does not
“bear a fair or reasonable relationship to the payor’s burdens on, or benefits received
from,” the Agency’s activity. (Art. XIII C, § 1, subd. (e), final par.) (We will refer to
this as the reasonable cost allocation or proportionality requirement.)
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Second, to the extent the Agency relies on its groundwater management activities
to justify including groundwater use in its rate structure, the benefit to the retailers from
those activities is at best indirect. Groundwater management activities are not a “service
. . . provided directly to the payor that is not provided to those not charged” (art. XIII C,
§ 1, subd. (e)(2)), but rather activities that benefit the Basin as a whole, including other
major groundwater extractors that are not charged for those services.
For both these reasons, the challenged rates cannot survive scrutiny under
Proposition 26. The Agency resists this straightforward conclusion, proffering two
principal arguments, melded together. The first is that the proportionality requirement is
measured “collectively,” not by the burdens on or benefits received by the individual
purveyor. The second is that the “government service or product” the Agency provides
to the four water retailers consists not just of providing wholesale water, but also of
“managing the Basin water supply,” including “management . . . of the Basin’s
groundwater.” These responsibilities, the Agency argues, make it reasonable to set rates
for its wholesale water service by “tak[ing] into account the entire Valley water supply
portfolio and collective purveyor-benefits of promoting conjunctive use, not just the
actual amount of Agency imported water purchased by each Purveyor . . . .”
Neither claim has merit, and the authorities the Agency cites do not support its
contentions.
a. Griffin I and the proportionality requirement
It seems plain to us, as it did to the trial court, that the demand for a product the
Agency does not supply – groundwater – cannot form the basis for a reasonable cost
allocation method: one that is constitutionally required to be proportional to the benefits
the rate payor receives from (or the burden it places on) the Agency’s activity. The
Agency’s contention that it may include the demand for groundwater in its rate structure
because the proportionality requirement is measured “collectively,” not by the burdens on
or benefits to the individual retail purveyor, is not supported by any pertinent authority.
In contending otherwise, the Agency relies on, but misunderstands, Griffith I and
other cases stating that proportionality “ ‘is not measured on an individual basis,’ ” but
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rather “ ‘collectively, considering all rate payors,’ ” and “ ‘need not be finely calibrated
to the precise benefit each individual fee payor might derive.’ ” (Griffith I, supra, 207
Cal.App.4th at p. 997, quoting California Farm Bureau Federation v. State Water
Resources Control Bd. (2011) 51 Cal. 4th 421, 438 [discussing regulatory fees under the
Water Code and Proposition 13].) As discussed post, these cases do not apply here, for
one or more reasons. Griffith I involves a different exemption from Proposition 26, and
other cases involve Proposition 218, which predated Proposition 26 and has no direct
application here. In addition to these distinctions – which do make a difference – the
cases involved large numbers of payors, who could rationally be (and were) placed in
different usage categories, justifying different fees for different classes of payors.
In Griffith I, the defendant city imposed an annual inspection fee for all residential
rental properties in the city. The court rejected a claim that the inspection fee was a tax
requiring voter approval under Proposition 26. (Griffith I, supra, 207 Cal.App.4th at p.
987.) Griffith I involves another of the seven exemptions in Proposition 26, the
exemption for regulatory fees – charges imposed for the regulatory costs of issuing
licenses, performing inspections, and the like. (Art. XIII C, § 1, subd. (e)(3) [expressly
excepting, from the “tax” definition, a “charge imposed for the reasonable regulatory
costs to a local government for . . . performing inspections”].)
The inspection fees in Griffith I met all the requirements of Proposition 26. The
city’s evidence showed the fees did not exceed the approximate cost of the inspections.
(Griffith I, supra, 207 Cal.App.4th at p. 997.) And the proportionality requirement of
Proposition 26 was also met: “The fee schedule itself show[ed] the basis for the
apportionment,” setting an annual registration fee plus a $20 per unit fee, with lower fees
for “[s]elf-certifications” that cost the city less to administer, and greater amounts
charged when reinspections were required. (Griffith I, at p. 997.) The court concluded:
“Considered collectively, the fees are reasonably related to the payors’ burden upon the
inspection program. The larger fees are imposed upon those whose properties require
the most work.” (Ibid., italics added.)
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Griffith I did, as the Agency tells us, state that “ ‘the question of proportionality is
not measured on an individual basis’ ” but rather “ ‘collectively, considering all rate
payors.’ ” (Griffith I, supra, 207 Cal.App.4th at p. 997.) But, as mentioned, Griffith I
was considering a regulatory fee, not, as here, a charge imposed on four ratepayers for a
“specific government service or product.” As Griffith I explained, “ ‘[t]he scope of a
regulatory fee is somewhat flexible’ ” and “ ‘must be related to the overall cost of the
governmental regulation,’ ” but “ ‘need not be finely calibrated to the precise benefit each
individual fee payor might derive.’ ” (Ibid.) That, of course, makes perfect sense in the
context of a regulatory fee applicable to numerous payors; indeed, it would be impossible
to assess such fees based on the individual payor’s precise burden on the regulatory
program. But the inspection fees were allocated by categories of payor, and were based
on the burden on the inspection program, with higher fees where more city work was
required.
Here, there are four payors, with no need to group them in classes to allocate costs.
The Griffith I concept of measuring proportionality “collectively” simply does not apply.
Where charges for a government service or product are to be allocated among only four
payors, the only rational method of evaluating their burdens on, or benefits received
from, the governmental activity, is individually, payor by payor. And that is particularly
appropriate considering the nature of the Proposition 26 exemption in question: charges
for a product or service that is (and is required to be) provided “directly to the payor.”
Under these circumstances, allocation of costs “collectively,” when the product is
provided directly to each of the four payors, cannot be, and is not, a “fair or reasonable”
allocation method. (Art. XIII C, § 1, subd. (e), final par.)
b. Griffith II – the proportionality requirement and related claims
In Griffith v. Pajaro Valley Water Management Agency (2013) 220 Cal. App. 4th
586 (Griffith II), the court concluded, among other things, that a groundwater
augmentation charge complied with the proportionality requirement of Proposition 218.
The Agency relies on Griffith II, asserting that the court applied the “concept of
collective reasonableness with respect to rate allocations . . . .” Further, the case
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demonstrates, the Agency tells us, that its activities in “management . . . of the Basin’s
groundwater” justify basing its rates on total water demand, because all four retailers
benefit from having the Agency’s imported water available, even when they do not use it.
Neither claim withstands analysis.
Griffith II involved a challenge under Proposition 218, so we pause to describe its
relevant points. Proposition 218 contains various procedural (notice, hearing, and voting)
requirements for the imposition by local governments of fees and charges “upon a parcel
or upon a person as an incident of property ownership, including a user fee or charge for
a property related service.” (Art. XIII D, § 2, subd. (e).) Fees or charges for water
service (at issue in Griffith II) are exempt from voter approval (art. XIII D, § 6, subd. (c)),
but substantive requirements apply. These include a proportionality requirement: that
the amount of a fee or charge imposed on any parcel or person “shall not exceed the
proportional cost of the service attributable to the parcel.” (Id., subd. (b)(3).)
In Griffith II, the plaintiffs challenged charges imposed by the defendant water
management agency on the extraction of groundwater (called a “groundwater
augmentation charge”). The defendant agency had been created to deal with the issue of
groundwater being extracted faster than it is replenished by natural forces, leading to
saltwater intrusion into the groundwater basin. (Griffith II, supra, 220 Cal.App.4th at
p. 590.) The defendant agency was specifically empowered to levy groundwater
augmentation charges on the extraction of groundwater from all extraction facilities,
“ ‘ “for the purposes of paying the costs of purchasing, capturing, storing, and
distributing supplemental water for use within [defendant’s boundaries].” ’ ” (Id. at p.
591.) The defendant’s strategy to do so had several facets, but its purpose was to reduce
the amount of water taken from the groundwater basin by supplying water to some
coastal users, with the cost borne by all users, “on the theory that even those taking water
from [inland] wells benefit from the delivery of water to [coastal users], as that reduces
the amount of groundwater those [coastal users] will extract [from their own wells],
thereby keeping the water in [all] wells from becoming too salty.’ ” (Id. at pp. 590-591.)
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Griffith II found the charge complied with the Proposition 218 requirement that
the charge could not exceed the proportional costs of the service attributable to the parcel.
(Griffith II, supra, 220 Cal.App.4th at pp. 600-601.) Proposition 218, the court
concluded, did not require “a parcel-by-parcel proportionality analysis.” (Griffith II, at p.
601.) The court found defendant’s “method of grouping similar users together for the
same augmentation rate and charging the users according to usage is a reasonable way to
apportion the cost of service,” and Proposition 218 “does not require a more finely
calibrated apportion.” (Griffith II, at p. 601.) The augmentation charge “affects those on
whom it is imposed by burdening them with an expense they will bear proportionately to
the amount of groundwater they extract at a rate depending on which of three rate classes
applies. It is imposed ‘across-the-board’ on all water extractors. All persons extracting
water – including any coastal users who choose to do so – will pay an augmentation
charge per acre-foot extracted. All persons extracting water and paying the charge will
benefit in the continued availability of usable groundwater.” (Griffith II, at pp. 603-604.)
The court rejected the plaintiffs’ claim the charge for groundwater extraction on
their parcels was disproportionate because they did not use the agency’s services – that is,
they did not receive delivered water, as coastal landowners did. This claim, the court
said, was based on the erroneous premise that the agency’s only service was to deliver
water to coastal landowners. The court pointed out that the defendant agency was created
to manage the water resources for the common benefit of all water users, and the
groundwater augmentation charge paid for the activities required to prepare and
implement the groundwater management program. (Griffith II, supra, 220 Cal.App.4th at
p. 600.) Further, the defendant agency “apportioned the augmentation charge among
different categories of users (metered wells, unmetered wells, and wells within the
delivered water zone).” (Id. at p. 601.) (The charges were highest for metered wells in
the coastal zone, and there was also a per acre-foot charge for delivered water. (Id. at p.
593 & fn. 4.))
We see nothing in Griffith II that assists the Agency here. The Agency focuses on
the fact that the defendant charged the plaintiff for groundwater extraction even though
16
the plaintiff received no delivered water, and on the court’s statement that the defendant
was created to manage water resources for the common benefit of all water users.
(Griffith II, supra, 220 Cal.App.4th at p. 600.) From this the Agency leaps to the
erroneous conclusion that the rates here satisfy the proportionality requirement simply
because all four retailers “benefit from having the Agency’s supplemental water supplies
available,” even when they do not use them. This is a false analogy. In Griffith II, the
defendant charged all groundwater extractors proportionately for extracting water (and
had the power to do so), and charged for delivered water as well. Griffith II does not
support the imposition of charges based on a product the Agency does not supply.
We note further that in Griffith II, more than 1,900 parcel owners were subject to
the groundwater augmentation charge, and they were placed in three different classes of
water extractors and charged accordingly. (Griffith II, supra, 220 Cal.App.4th at pp. 593,
601.) Here, there are four water retailers receiving the Agency’s wholesale water service,
none of whom can reasonably be placed in a different class or category from the other
three. In these circumstances, to say costs may be allocated to the four purveyors
“collectively,” based in significant part on groundwater not supplied by the Agency,
because “they all benefit” from the availability of supplemental water supplies, would
effectively remove the proportionality requirement from Proposition 26.
That we may not do. Proposition 26 requires by its terms an allocation method
that bears a reasonable relationship to the payor’s burdens on or benefits from the
Agency’s activity, which here consists of wholesale water service to be provided
“directly to the payor.” In the context of wholesale water rates to four water agencies,
this necessarily requires evaluation on a “purveyor by purveyor” basis. (Cf. Capistrano
Taxpayers Assn., Inc. v. City of San Juan Capistrano (2015) 235 Cal. App. 4th 1493, 1514
(Capistrano) [“[w]hen read in context, Griffith [II] does not excuse water agencies from
ascertaining the true costs of supplying water to various tiers of usage”; Griffith II’s
“comments on proportionality necessarily relate only to variations in property location”;
“trying to apply [Griffith II] to the [Proposition 218 proportionality] issue[] is fatally
flawed”].)
17
The Agency’s claim that it is not charging the retailers for groundwater use, and
its attempt to support basing its rates on total water demand by likening itself to the
defendant agency in Griffith II, both fail as well. The first defies reason. Because the
rates are based on total water demand, the more groundwater a retailer uses, the more it
pays under the challenged rates. The use of groundwater demand in the rate structure
necessarily means that, in effect, the Agency is charging for groundwater use.
The second assertion is equally mistaken. The differences between the Agency
and the defendant in Griffith II are patent. In Griffith II, the defendant agency was
created to manage all water resources, and specifically to deal with saltwater intrusion
into the groundwater basin. The Agency here was not. It was created to acquire water
and to “provide, sell, and deliver” it. It is authorized to develop and implement
groundwater management plans only with the approval of the retail water purveyors (and
other major groundwater extractors). In other words, while the Agency functions as the
lead agency in developing and coordinating groundwater management plans, its only
authority over groundwater, as the trial court found, is a shared responsibility to develop
those plans. Further, in Griffith II, the defendant agency was specifically empowered to
levy groundwater extraction charges for the purpose of purchasing supplemental water.
The Agency here was not. As the trial court here aptly concluded, Griffith II “does not
aid [the Agency] for the simple reason that [the Agency] has no comprehensive authority
to manage the water resources of the local groundwater basin and levy charges related to
groundwater.”4
Finally, the Agency insists that it “must be allowed to re-coup its cost of service,”
and that the practice of setting rates to recover fixed expenses, “irrespective of a
customer’s actual consumption,” was approved in Paland v. Brooktrails Township
4 The trial court also observed that, “[a]part from [the Agency’s] lack of authority to
supply or manage Basin groundwater, Newhall correctly notes that [the Agency] has
presented no evidence of its costs in maintaining the Basin.”
18
Community Services Dist. Bd. of Directors (2009) 179 Cal. App. 4th 1358 (Paland).
Paland has no application here.
Paland involved Proposition 218. As we have discussed, Proposition 218 governs
(among other things) “property related fees and charges” on parcels of property. Among
its prohibitions is any fee or charge for a service “unless that service is actually used by,
or immediately available to, the owner of the property in question.” (Art. XIII D, § 6,
subd. (b)(4).) The court held that a minimum charge, imposed on parcels of property
with connections to the district’s utility systems, for the basic cost of providing water
service, regardless of actual use, was “a charge for an immediately available property-
related water or sewer service” within the meaning of Proposition 218, and not an
assessment requiring voter approval. (Paland, supra, 179 Cal.App.4th at p. 1362; see id.
at p. 1371 [“Common sense dictates that continuous maintenance and operation of the
water and sewer systems is necessary to keep those systems immediately available to
inactive connections like [the plaintiff’s].”].)
We see no pertinent analogy between Paland and this case. This case does not
involve a minimum charge imposed on all parcels of property (or a minimum charge for
standing ready to supply imported water). Newhall does not contest the Agency’s right
to charge for its costs of standing ready to provide supplemental water, and to recoup all
its fixed costs. The question is whether the Agency may recoup those costs using a cost
allocation method founded on the demand for groundwater the Agency does not supply,
and is not empowered to regulate without the consent of groundwater extractors. The
answer under Proposition 26 is clear: it may not. Paland does not suggest otherwise.5
5 The parties refer to other recent authorities to support their positions in this case.
We may not rely on one of them, because the Supreme Court has granted a petition for
review. (City of San Buenaventura v. United Water Conservation District (2015) 235
Cal. App. 4th 228, review granted June 24, 2015, S226036.) The Agency cites the other
case extensively in its reply brief, but we see nothing in that case to suggest that the
challenged rates here comply with Proposition 26. (Great Oaks Water Co. v. Santa Clara
Valley Water District 242 Cal. App. 4th 1187 (Great Oaks).)
19
c. Other claims – conservation and “conjunctive use”
The Agency attempts to justify the challenged rates by relying on the conservation
mandate in the California Constitution, pointing out it has a constitutional obligation to
encourage water conservation. (Art. X, § 2 [declaring the state’s water resources must
“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 [must] be prevented”].) The
challenged rates comply with this mandate, the Agency contends, because reducing total
water consumption will result in lower charges, and the rates encourage “a coordinated
use of groundwater and supplemental water” (conjunctive use). This argument, too,
misses the mark.
The Agency’s brief fails to describe the circumstances in Great Oaks. There, a
water retailer challenged a groundwater extraction fee imposed by the defendant water
district. Unlike this case, the defendant in Great Oaks was authorized by statute to
impose such fees, and its major responsibilities included “preventing depletion of the
aquifers from which [the water retailer] extracts the water it sells.” (Great Oaks, supra,
242 Cal.App.4th at p. 1197.) The Court of Appeal, reversing a judgment for the plaintiff,
held (among other things) that the fee was a property-related charge, and therefore
subject to some of the constraints of Proposition 218, but was also a charge for water
service, and thus exempt from the requirement of voter ratification. (Great Oaks, at p.
1197.) The trial court’s ruling in Great Oaks did not address the plaintiff’s contentions
that the groundwater extraction charge violated three substantive limitations of
Proposition 218, and the Court of Appeal ruled that one of those contentions (that the
defendant charged more than was required to provide the property related service on
which the charge was predicated) could be revisited on remand. The others were not
preserved in the plaintiff’s presuit claim, so no monetary relief could be predicated on
those theories. (Great Oaks, at pp. 1224, 1232-1234.)
The Agency cites Greak Oaks repeatedly, principally for the statements that the
“provision of alternative supplies of water serves the long-term interests of extractors by
reducing demands on the groundwater basin and helping to prevent its depletion,” and
that it was not irrational for the defendant water district “to conclude that reduced
demands on groundwater supplies benefit retailers by preserving the commodity on
which their long-term viability, if not survival, may depend.” (Great Oaks, supra, 242
Cal.App.4th at pp. 1248-1249.) These statements, with which we do not disagree, have
no bearing on this case, and were made in connection with the court’s holding that the
trial court erred in finding the groundwater extraction charge violated the statute that
created and empowered the defendant water district. (Id. at pp. 1252-1253.)
20
Certainly the Agency may structure its rates to encourage conservation of the
imported water it supplies. (Wat. Code, § 375, subd. (a) [public entities supplying water
at wholesale or retail may “adopt and enforce a water conservation program to reduce the
quantity of water used by [its customers] for the purpose of conserving the water supplies
of the public entity”]. But the Agency has no authority to set rates to encourage
conservation of groundwater it does not supply. Moreover, article X’s conservation
mandate cannot be read to eliminate Proposition 26’s proportionality requirement. (See
City of Palmdale v. Palmdale Water District (2011) 198 Cal. App. 4th 926, 936-937
[“California Constitution, article X, section 2 is not at odds with article XIII D
[Proposition 218] so long as, for example, conservation is attained in a manner that ‘shall
not exceed the proportional cost of the service attributable to the parcel.’ ”]; see id. at p.
928 [district failed to prove its water rate structure complied with the proportionality
requirement of Proposition 218]; see also Capistrano, supra, 235 Cal.App.4th at p. 1511,
quoting City of Palmdale with approval.)
The Agency also insists that basing its rates only on the demand for the imported
water it actually supplies – as has long been the case – would “discourage users from
employing conjunctive use . . . .” The Agency does not explain how this is so, and we are
constrained to note that, according to the Agency’s own 2003 Groundwater Management
Plan, Newhall and the other retailers “have been practicing the conjunctive use of
imported surface water and local groundwater” for many years. And, according to that
plan, the Agency and retailers have “a historical and ongoing working relationship . . . to
manage water supplies to effectively meet water demands within the available yields of
imported surface water and local groundwater.”
In connection, we assume, with its conjunctive use rationale, the Agency filed a
request for judicial notice, along with its reply brief. It asked us to take notice of three
documents and “the facts therein concerning imported water use and local groundwater
production” by Newhall and the other water retailers. The documents are the 2014 and
2015 Water Quality Reports for the Santa Clarita Valley, and a water supply utilization
table from the 2014 Santa Clarita Valley Water Report published in June 2015. All of
21
these, the Agency tells us, are records prepared by the Agency and the four retailers, after
the administrative record in this case was prepared. The documents “provide further
support” as to the “cooperative efforts of the Agency and the Purveyors in satisfying
long-term water supply needs,” and “provide context and useful background to aid in the
Court’s understanding of this case.” The Agency refers to these documents in its reply
brief, pointing out that since 2011, Newhall has increased its imported water purchases
because of the impact of the current drought on certain of its wells, while retailer
Valencia Water Company increased groundwater pumping and purchased less imported
water in 2014. These cooperative efforts, the Agency says, “reflect the direct benefit to
Newhall of having an imported water supply available to it, whether or not it maximizes
use of imported water in a particular year.”
We deny the Agency’s request for judicial notice. We see no reason to depart
from the general rule that courts may not consider evidence not contained in the
administrative record. (Western States Petroleum Assn. v. Superior Court (1995) 9
Cal. 4th 559, 564; cf. id. at p. 578 [the exception to the rule in administrative proceedings,
for evidence that could not have been produced at the hearing through the exercise of
reasonable diligence, applies in “rare instances” where the evidence in question existed at
the time of the decision, or in other “unusual circumstances”].) Denial is particularly
appropriate where judicial notice has been requested in support of a reply brief to which
the opposing party has no opportunity to respond, and where the material is, as the
Agency admits, “further support” of evidence in the record, providing “context and useful
background.” These are not unusual circumstances.
Returning to the point, neither conservation mandates nor the Agency’s desire to
promote conjunctive use – an objective apparently shared by the retailers – permits the
Agency to charge rates that do not comply with Proposition 26 requirements. Using
demand for groundwater the agency does not supply to allocate its fixed costs may
“satisf[y] the Agency’s constitutional obligations . . . to encourage water conservation,”
22
but it does not satisfy Proposition 26, and it therefore cannot stand.6 (Cf. Capistrano,
supra, 235 Cal.App.4th at pp. 1511, 1498 [conservation is to be attained in a manner not
exceeding the proportional cost of service attributable to the parcel under Proposition
218; the agency failed to show its tiered rates complied with that requirement].)
d. Other Proposition 26 requirements
We have focused on the failure of the challenged rates to comply with the
proportionality requirement of Proposition 26. But the rates do not withstand scrutiny for
another reason as well. Proposition 26 exempts the Agency’s charges from voter
approval only if the charge is imposed “for a specific government service or product
provided directly to the payor that is not provided to those not charged . . . .” (Italics
added.) The only “specific government service or product” the Agency provides directly
to the retailers, and not to others, is imported water. As the trial court found: the Agency
“does not provide Newhall groundwater. It does not maintain or recharge aquifers. It
does not help Newhall pump groundwater. Nor does it otherwise contribute directly to
the natural recharge of the groundwater Newhall obtains from its wells.”
The groundwater management activities the Agency does provide – such as its
leadership role in creating groundwater management plans and its perchlorate
remediation efforts – are not specific services the Agency provides directly to the
retailers, and not to other groundwater extractors in the Basin. On the contrary,
groundwater management services redound to the benefit of all groundwater extractors in
the Basin – not just the four retailers. Indeed, implementation of any groundwater
6 The Agency also cites Brydon v. East Bay Municipal Utility District (1994) 24
Cal. App. 4th 178 for the principle that, in pursuing a constitutionally and statutorily
mandated conservation program, “cost allocations . . . are to be judged by a standard of
reasonableness with some flexibility permitted to account for system-wide complexity.”
(Id. at p. 193.) But Brydon predated both Proposition 218 and Proposition 26. (See
Capistrano, supra, 235 Cal.App.4th at pp. 1512-1513 [Brydon “simply has no application
to post-Proposition 218 cases”; “it seems safe to say that Brydon itself was part of the
general case law which the enactors of Proposition 218 wanted replaced with stricter
controls on local government discretion”].)
23
management plan is “subject to the rights of property owners and with the approval of the
retail water purveyors and other major extractors of over 100 acre-feet of water per
year.” (Wat. Code Appen., § 103-15.2, subds. (b)&(c), italics added.)
Certainly the Agency may recover through its water rates its entire cost of service
– that is undisputed. The only question is whether those costs may be allocated,
consistent with Proposition 26, based in substantial part on groundwater use. They may
not, because the Agency’s groundwater management activities plainly are not a service
“that is not provided to those not charged . . . .” (Art. XIII C, § 1, subd. (e)(2).)
In light of our conclusion the challenged rates violate Proposition 26, we need not
consider the Agency’s contention that the rates comply with Government Code
section 54999.7 and the common law. Nor need we consider the propriety of the remedy
the trial court granted, as the Agency raises no claim of error on that point.
DISPOSITION
The judgment is affirmed. Plaintiff shall recover its costs on appeal.
GRIMES, J.
WE CONCUR:
BIGELOW, P. J. FLIER, J.
24