LOS ANGELES (CN) - A Los Angeles Superior Court judge properly determined that Castaic Lake Water Agency's wholesale water rate hike in February 2013 violated state law, a California appeals court ruled.
Summing up the ruling, the plaintiff's attorney Michael Colantuono told Courthouse News: "This case says a class-based rate is OK when necessary, but when you have only four customers, it ain't OK."
A three-judge panel on Division Eight of the Second Appellate District unanimously affirmed the trial court ruling in Newhall County Water District v. Castaic Lake Water Agency et al.
The Castaic Lake Water Agency, established in 1962, imports water primarily from the State Water Project, which it buys under contract from the Department of Water Resources and sells at wholesale to four water district in the Santa Clarita Valley, including Newhall.
Two of its other customers, Santa Clarita Water Division and Valencia Water Co., account for 83 percent of water demand in the Santa Clarita Valley; Los Angeles County Waterworks District No. 36 accounts for less than 2 percent.
Newhall sells most of its 15 percent share to single-family homes in communities near Santa Clarita. It also owns and operates 11 groundwater wells. Santa Clarita, pop. 180,000, is the third-largest city in Los Angeles County.
As the oldest water provider in the area, the Newhall water district has the most right to use groundwater, which is cheaper than water from the State Water Project, Colantuono told Courthouse News.
When several wells in the Santa Clara River Valley Groundwater Basin were found to be contaminated with perchlorate, a common oxidizer in fireworks and rocket propellants, Newhall and the agency's other customers significantly increased the amount of water they bought from the agency rather than relying on groundwater.
Before the perchlorate contamination, Newhall's purchases of imported water fluctuated yearly but averaged 11 percent of its water demand. That number increased to 52 percent during the contamination period and fell to approximately 25 percent in 2012, while the other retailers continue to "rely more heavily" on imported water, according to Appellate Court Judge Elizabeth Grimes' case summary in the Jan. 19 ruling.
At issue was the Castaic Lake Water Agency's change from a fixed rate based on per-acre foot of imported water sold, known as volumetric rate, to a two-component system consisting of a fixed charge based on a three-year average of a retailer's total water use, including groundwater, and a variable charge for each acre-foot of imported water.
Castaic claimed that it needed to alter its wholesale water rates to stabilize its revenue, which fluctuated along with demand for imported water. It also claimed the new system to "provide cost equity" to retailers, optimize water resources, and encourage conservation.
But the new structure increased Newhall's charges by 67 percent, while reducing the charges for the agency-controlled retailers.
Newhall said the new system did not fairly reflect its demand: It proposed a rate structure that used demand of imported water as a base for the fixed charge calculation. But Castaic Lake adopted the challenged rates, which took effect July 1, 2013.
Newhall promptly sued, claiming the rate hike violated Proposition 26 because they were disproportional to Newhall's actual benefits from the agency's service. It sought writ of mandate to force the agency to set aside the rate hike, stop charging for imported water based on the volume of groundwater Newhall used, and refunds.
The trial court sided with Newhall, finding that Castaic Lake cannot impose rates based on groundwater, which it does not supply, and that the fee hike violated laws requiring that charges be fair to ratepayers.
On appeal, Castaic Lake claimed that the proportionality requirement under Prop. 26 is measured collectively, not based on an individual retailer. It also argued that it manages the groundwater as well as imported wholesale water, giving it the right to determine rates based on the entire water supply.
The Second Appellate District on Tuesday rejected those arguments.
"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," Judge Grimes wrote.
Contentions that proportionality should be measured collectively rather than individually fail here because only four water retailers pay for a specific government service - not hundreds of customers charged a regulatory fee.
With just four customers, "the only rational method of evaluating their burdens on, or benefits received from, the governmental activity, is individually, payor by payor," Grimes wrote.
Arguments that the agency is not charging for groundwater but for total water use fail because the more groundwater a retailer uses, the more it will be charged. Moreover, the agency was created to sell and deliver water to its customers, not manage all water resources in an area. Its only authority over groundwater is in developing management plans, not charging for its use, the court ruled.
Nor were the judges persuaded by the agency's claim that the new rate structure will encourage water conservation, because using less water would lead to lower rates. Though the agency can use its rate structure to encourage conservation of imported water, it has no authority to apply those rates to groundwater, which it does not supply, Grimes wrote.
Newhall's attorney Michael Colantuono called the decision "very helpful."
"There is a lot of water rate litigation going on right now. This is one of the first cases brought under Prop. 26," he told Courthouse News.
In general, water contractors with many customers divide them into classes, such as single family, multiple family residence, and industrial, and set rates accordingly, Colantuono said.
He said the parties are discussing settlement and may arrive at an amicable solution.
Castaic Lake Water Agency was represented by Jeffrey Dunn with Best, Best & Krieger, who said he could not comment because he has not yet discussed the ruling with the water agency.
Presiding Judge Tricia Bigelow and Judge Madeline Frier concurred.
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