1. Legal Aspects/Prop 218 Joan Arneson August 13, 2008

2. Irvine Ranch Water District Legal Perspective Overview Tiered rates and Proposition 218 Background – how did conservation rates make it this far? Bighorn – a stumbling block for conservation rates? Elements of 218 – zeroing in on the problem Overcoming the Obstacles IRWD’s Approach

3. Irvine Ranch Water District Before Proposition 218 In 1977, Water Code 375 allowed water conservation measures to be adopted after a public hearing & findings of necessity –1992 amendment added “rate structure design,” after 158 agencies signed on to the urban water conservation MOU Proposition 13 passed in 1978. Beaumont Investors vs. Beaumont-Cherry Valley Water District (1985). Fee-setting is constrained by reasonable cost of service. Brydon (1994). East Bay MUD’s inclining block rate structure is successful against a challenge that it was an invalid tax under Proposition 13.

4. Irvine Ranch Water District After 218, Conservation Rates Still Going Proposition 218 passed in 1996 2000: Howard Jarvis Taxpayers Assn vs. City of Los Angeles –found water commodity rates not property-related Like other commodity rates, conservation rates could be considered incident to the demand for the service

5. Irvine Ranch Water District Bighorn - 2006 California Supreme Court: water delivery charges are property related Water service has a direct relationship to property ownership: “‘Water is indispensable to most uses of real property.’” Commodity argument is rejected

6. Irvine Ranch Water District Conservation Rates and 218 What are the elements of Proposition 218? –Procedural requirements: notice, hearing, protest –Substantive requirements Cost and revenue nexus Parcel-by-parcel proportionality

7. Irvine Ranch Water District Cost and Revenue Nexus Proposition 218 requires that “Revenues derived from the fee or charge” shall not – “exceed the funds required to provide the property-related service” and – “be used for any purpose other than that for which the fee or charge was imposed.” Nexus Water revenues ↔ overall cost of water service

8. Irvine Ranch Water District Parcel-by-Parcel Proportionality Key Issue : Proposition 218 requires that “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” But does this mean mathematical separation of the tiers? And what about pricing signal? First step toward parcel proportionality - refining the overall cost-revenue nexus: Revenue from tiers ($ over basic commodity rate) ↔ conservation costs + overuse costs

9. Irvine Ranch Water District Refining the Nexus Conservation Costs –Public education –Best management practices –Irrigation controls and devices –Retrofitting for recycled water and alternative supplies –Some may go in basic commodity rate if expected of all users Overuse Costs –Control and treatment of runoff from outdoor use Exclude stormwater (Salinas case) - no nexus with water use –More expensive supplies –Dry-year supply arrangements Operating or Capital

10. Irvine Ranch Water District Where After That? Once you have a match between overuse/conservation costs and conservation charge revenue, how do you get the rest of the way? Is there a requirement to break that down between tiers and analyze the actual cost of water service within each tier? Does that mathematical approach to parcel proportionality defeat pricing signal?

11. Irvine Ranch Water District Alternatives Attempt to structure conservation charges as regulatory fees so they will not be property-related service charges –Regulatory fees still have to show a reasonable revenue-cost nexus –Functionally may still be a “water delivery charge” Merge 218 and Article X

12. Irvine Ranch Water District Article X 1928 initiative measure Article X Section 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. …”

13. Irvine Ranch Water District Article X Brydon: Inclined block rate pricing responds to Article X constitutional mandate. Proposition 13 was not intended to eviscerate Article X mandate compelling water conservation. Same logic can apply to 218 – must be reconciled with the Article X mandate.

14. Irvine Ranch Water District Putting 218 and Article X Together Bighorn: guidance for harmonizing Article X and Proposition 218 - water consumption above basic allocation not “indispensable.” Comply with 218 procedure Comply with 218 overall revenue –service cost nexus Create basic allocations that provide enough water for reasonable use Ensure parcel proportionality with service classes, meter sizes, pumping charges, etc.

15. Irvine Ranch Water District Putting 218 and Article X Together Refine parcel proportionality by ensuring that those who stay within basic use allocation don’t pay for costs generated by those who don’t: –Match conservation and overuse costs to conservation charge revenue Consider waste to be beyond use indispensable to property and within the realm of Article X: –Create an effective pricing signal in the tiers to respond to Article X

16. Irvine Ranch Water District Legal Considerations – Prop 218 Procedural Same procedure as for other water rates 45 day notice Proposition 218 requires the hearing notice to each parcel to include: –“amount” of the fee or charge –“basis” for calculation –“reason” for the fee or charge

17. Irvine Ranch Water District Legal Considerations – Prop. 218 Procedural IRWD does this on the 218 notice, by asterisked reference to basic commodity rates: *IRWD uses a five tiered rate structure that promotes conservation. Customers who stay within their allocation will remain in the first two tiers. Water allocations are based on dwelling type, number of residents, landscape square footage and actual daily weather and evapotranspiration data for your area. Tiered rates above the base rate are: Inefficient (101-150% of allocation) at 2x Base Rate; Excessive (151-200% of allocation) at 4x the Base Rate; Wasteful (201% + of allocation) at 8x Base Rate.

18. Irvine Ranch Water District AB 2882 Adds authority separate from Water Code 375 – an everyday practice – no finding of emergency or water shortage condition Urban runoff Recognizes Article X as an element that has to be considered in proportionality, once there is a basic allocation for reasonable use

19. Irvine Ranch Water District Questions?