Correction: An earlier version of this story contained incorrect information from The Associated Press about the decision by the 4th District Court of Appeal. The ruling is binding statewide. However, appellate courts outside Orange County could rule differently, and the state Supreme Court may ultimately decide the issue.
Officials from communities around San Luis Obispo County are studying an appellate court ruling out of Southern California this week to determine how it could impact their water rates — specifically, tiered pricing that is often set to target higher water users.
“The dust has to settle, and that’s going to take some time,” said Michael LeBrun, general manager of the Nipomo Community Services District. “We’ve got to wait and see just what the breadth of this ruling is and how applicable it is across tiered-rate approaches.”
An appeals court ruling issued Monday found San Juan Capistrano’s water rates are unconstitutional and struck down punitive water pricing, sending some water agencies scrambling to review their rates. Two-thirds of water districts use some form of tiered water pricing.
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The 4th District Court of Appeal said charging heavy users incrementally more per gallon without showing it cost more violates a 1996 voter-approved law, Proposition 218, which prohibits government agencies from overcharging for services, according to The Associated Press.
The decision comes amid a severe drought as agencies try to meet the governor’s mandate to cut water use statewide by 25 percent.
The Nipomo district is one of numerous agencies in the county with a tiered water rate structure for its customers. Others are Arroyo Grande, Grover Beach, Los Osos Community Services District, Morro Bay, Oceano, Pismo Beach and San Luis Obispo.
The ruling doesn’t apply to private water agencies such as Atascadero Mutual Water Co. The nonprofit water utility, which has had a tiered rate structure since the late 1970s, provides water to Atascadero property owners, the city of Atascadero’s operations, and some others in the county’s unincorporated areas, General Manager John Neil said.
Paso Robles is the only city in the county without a tiered water rate system. City staff said Wednesday that they were considering developing a proposed tiered rate system to encourage conservation for its next rate adjustment in late summer, currently being prepared.
But given the court ruling, they’re re-evaluating that idea.
On Wednesday, several local officials said they’re still reviewing the ruling to determine whether any changes are needed to their water rate structures.
In the meantime, several communities are moving ahead with rate increases or anticipate starting the process in the next year or two.
San Luis Obispo officials plan to meet with their rate consultant to ensure the city is in compliance with current law. The decision has raised the bar on how cities calculate their tiered rates, Utilities Services Manager Ron Munds said.
“That has always been built into our philosophy of the two-tier system,” he said. “With this decision we have to dial in those true costs that we’re already associating with the tiers.”
The city is also moving ahead with a rate increase, with a public hearing scheduled for June 16. The increase would mainly impact the base fee paid by all customers.
Arroyo Grande officials have initially reviewed the ruling and don’t believe it will impact the city’s three-tier system, Public Works Director Geoff English said.
Higher costs in the tiered rates reflect a higher cost to deliver additional water. For example, additional groundwater pumping requires additional electricity, which requires additional staff costs, he said.
“We did not establish arbitrary and punitive conservation-minded rates in our top tiers,” he said.
In Nipomo’s case, the district has a four-tier structure that charges residential customers higher amounts based on use.
The main driving force behind the tiers is conservation, LeBrun said, but the rates are set to recover the district’s costs of providing the water.
“Conservation tiering has shown to be an effective tool in getting that per capita consumption down and keep it down,” he said.
Impact of ruling
The recent ruling does not make tiered pricing illegal. But agencies or cities have to show price increases are directly tied to the cost of the water.
The court said that San Juan Capistrano’s rate schedule charged residential customers $2.47 per unit in the first tier and $9.05 per unit in the fourth. One unit of water is equal to one hundred cubic feet, or about 748 gallons.
The decision states that nothing in Proposition 218 prevents water agencies from passing on the incrementally higher costs of expensive water to incrementally higher users, according to the ruling. But the law “does require they figure out the true cost of water, not simply draw lines based on water budgets.”
The Oceano Community Services District approved a water rate increase Monday in part to close a budget deficit in its water fund.
The increase, which goes into effect in May, will impose tiered drought emergency rates, adding additional charges based on water consumption. The board also included a “post-drought” plan that would reduce the rates again once the district board declares the drought emergency over.
General Manager Paavo Ogren said the district made an effort to show how its costs would be covered through the tiered rates and tied some specific expenses — such as part of the cost to deliver state water — to its tiered rates.
“We demonstrated how we went about doing this, and that’s the stark contrast — they (San Juan Capistrano) didn’t provide any evidence as to how they calculated tiered rates,” he said.
The Los Osos Community Services District also has a tiered rate system, but the district declined to comment for this story, district general manager Kathy Kivley said.
Morro Bay hired a water rate consultant who has proposed four tiers based on cost, Public Works Director Rob Livick said.
“We are of the opinion that the proposed rate structure complies with the latest ruling,” Livick said. “The higher-use customers place a higher demand upon the system and require higher capacity to serve those customers.”
In Grover Beach, the tiered rates are based on system requirements, not conservation or damage to the system, Public Works Director Greg Ray said.
“Higher flow rates (higher usage) requires larger pipes, larger tanks, larger meters, greater pumping levels from greater well depths causing increases in power usage, higher treatment costs, and increases in other operating and maintenance costs,” he wrote in an email.
In Nipomo, customers will see a 30 percent rate increase in July when water starts flowing to the community through a pipeline from Santa Maria. The district will likely pursue another study of its water rates in a year to 18 months.
“We’ve been four-tier structure for three years now,” LeBrun said. “It’s been effective. Our per capita use has gone down. We expect to stay with tiered pricing, but we’ll look with eyes wide open and make sure the rate structures are defensible.”