The San Diego panel of the Court of Appeal released a recent decision which threatens a wave of new lawsuits challenging water rates. The decision in Coziahr v. Otay Water District issued on July 15, 2024 and local governments are now beginning to grapple with its far-reaching implications.
Plaintiffs’ class action counsel sued the Otay Water District, which serves areas along the border with Mexico south and east of San Diego, and the City of San Diego in one case to challenge tiered water rates. Those impose progressively higher rates as more water is used to encourage conservation and to reflect the higher cost of supplying marginal water supplies to meet inefficient demands. The cases were tried separately but led to an $18 million refund award against Otay and a $78 million dollar award against San Diego. The San Diego case is still pending before the Riverside Court of Appeal.
Coziahr v. Otay Water District affirmed the District’s loss and decided a great many open issues in Proposition 218 litigation, holding there must be data of “actual costs” to support rate-making rather than reasonable projections of costs and expenses, rates must be more than “reasonable.” but must instead be supported by “relevant, verifiable data to support … analysis” of costs. The decision criticized the agency’s allocation of its costs to the fixed and variable portion of rates — something previously understood to be left to ratemakers’ discretion. The lengthy ruling also critiques the District’s reliance on the American Water Works Association’s M-1 Manual on ratemaking — the most widely cited authority in this field. The Court of Appeal upheld the trial court’s rejection of Otay’s tiered rates because “Otay lacked data to allocate peaking costs,” which have traditionally be allocated based on a reasonable estimate of each customer class’s contribution to those costs. It did rule for the District on one point regarding the calculation of refunds and remanded to redetermine their amount.
As to litigation procedure, it allows discovery and expert evidence in such cases rather than requiring litigation on the agency’s record, concluded that refunds are allowed rather than just a prospective order to change rates (and pay attorney fees), and allowing only very limited appellate review of trial court reasoning.
All of this is very bad news for California’s public water suppliers. Neary every water rate uses one or more of the approaches rejected by this Court. It greatly increases the risk of litigation for all agencies.
However, the District has petitioned the California Supreme Court to review the case and both the District and another agency have asked the Supreme Court to depublish it — which would strip it of force as to all agencies other than Otay. The Court must decide whether to grant review by late November (assuming it extends its time to decide from 60 to 90 days, as it commonly does). There is no deadline to act on a depublication request, but the Court will likely act on those along with the petition for review.
In addition, there is some good news. Three bills are on Governor Newsom’s desk which will reduce the risk of water rates litigation. AB 1827 (Papan, D-Millbrae) would authorize water agencies to impose tiered rates based on higher water use, maximum potential water use, and/or projected peak use, contradicting many of Coziahr’s merits conclusions. AB 2257 (Wilson, D-Suisun City) would authorize local agencies to establish a duty to exhaust issues in agency ratemaking hearings before suit under Proposition 218 and limit litigation to the administrative record. Because Coziahr was decided based almost exclusively on extra-record, expert evidence, its analysis may be of little use in future, record cases if the Governor signs this bill. SB 1072 (Padilla, D-Chula Vista) would limit the remedy in a Proposition 218 case to a prospective credit in a subsequent ratemaking, forbidding refunds, contradicting Coziahr’s remedy ruling. The Governor must act on these bills by the end of September.
And a recent decision of the Sacramento Court of Appeal holds that actions to reduce rates cannot be challenged under Proposition 26 and that is likely good authority under Proposition 218, too. This is City of Gridley v. Superior Court, decided September 11, 2024.
So, what can a City or water district do to limit its risk of a ratemaking challenge? First, don’t raise rates more often than necessary – a five year ratemaking with some form of inflation adjustment annually is a common approach. You want to reopen the statute of limitations for suit as little as possible. Second, make a strong record of the costs and their allocation that underlie your rates and have it reviewed by a lawyer with expertise in this area. Third, implement AB 2257 (if it becomes law) to require would-be challengers to participate in your ratemaking hearings and identify their legal theories so you can consider them and adjust your rates or make a record as to why adjustment is not necessary. Fourth, communicate consistently (and persistently) with your customers so they know what they are paying and why. Fifth, to the extent possible, avoid controversy – plaintiffs’’ lawyers find their clients on the internet. Sixth, follow the news, there will be new developments soon, no doubt.
It is a dangerous world out there for water ratemakers. These tips should be make it just a bit safer.
Authored by Michael G. Colantuono, Esq.
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