The Fourth District Court of Appeal in California has released a decision regarding the procedural requirements of Proposition 218 as applied to water rates. The case is Morgan v. Imperial Irrigation District, Case Nos. D060146 and D061087, and while the decision is currently unpublished, it is likely that publication will be requested by one or more interested agencies in the near future.
The case concerned increases in irrigation water rates charged by the Imperial Irrigation District, one of the largest irrigation districts in the state. The District conducted a cost-of-service study in 2009 and provided notice of potential rate increases to all its customers, including a form for customers to file protests under Prop 218. Protests were received from customers representing 40.47 percent of fields counted under a canal-gate-field method, and 31.25 percent counted under a legal parcel method, thus failing to reach the 50 percent required for a successful challenge. Several individual landowners and the Imperial County Farm Bureau filed suit against the District, alleging that the protest procedure was not sufficient.
Prop 218 limits the authority of government agencies to impose property related fees or charges, including water rates. Like other taxpayer protections in California, Prop 218 is contained in the state constitution, at Article XIIID. Prop 218 requires government agencies to follow certain procedures in adopting or increasing water rates and limits those rates to the amounts necessary to provide the property related service, with the rates for any parcel not exceeding the proportional cost of service attributable to the parcel.
The Farm Bureau and landowners argued that the District violated Prop 218 by holding a single protest election, rather than separate elections for each rate class to be increased. The plaintiffs reasoned that “because the District proposed different rate increases across its spectrum of customers, each rate increase should have been subject to its own, separate protest process with only those customers voting who would be affected by the specific rate increase.” The court rejected that argument, holding that Prop 218 does not require separate protest processes, but allows a single omnibus process.
In reaching that conclusion, the court found no language in Section 6 of Prop 218 that expresses or implies a separate process requirement. The court also found the omission in Section 6 of proportional vote weighing for property related fees—as is present in Section 4 related to assessments—to be significant. From a practical standpoint, the court observed that if one rate class successfully objected to its portion of agency rates, the agency would not be able to make up the difference in covering the cost of service by imposing higher, disproportional rates on other customers, which would lead to a reduction in services. The court also noted that separate protest processes could provide a minority of landowners with an effective veto of an entire rate plan, thus overriding the will of the majority contrary to the overall purpose of Prop 218.
The landowners also argued that the protest hearing was not sufficiently “public” because the District refused to provide the names of customers who had lodged protests. The court held that nothing in Prop 218 requires a government agency to make public either the protests received or a list of persons eligible to file a protest. Thus, there was no basis for the landowners’ argument.
The landowners argued that the rate increases violated the substantive requirements of Prop 218 because the cost-of-service study relied on poor quality data. The court refused to weigh the conflicting evidence presented at trial, holding that the proper test on appeal was whether substantial evidence existed to support the trial court’s decision. Finding substantial evidence in the trial record that the District’s data was of sufficient quality, the court did not disturb the trial court ruling on the landowners’ substantive contentions.
Finally, the court concluded that many of the issues raised by the plaintiffs were forfeited based on failure to argue those points before the trial court. For example, the plaintiffs argued to the Court of Appeal that the District had not proven the cost-of-service standards of the American Water Works Association (AWWA) meet the requirements of Prop 218, but the court did not consider the merits of the argument because it had not been raised previously.
The Morgan v. Imperial Irrigation District decision is important in holding that a governmental agency does not need to conduct a separate protest process for each customer class, but can conduct a single omnibus process for all classes subject to a rate increase. In addition, the court held that an agency need not make publicly available lists of either eligible protestants or protests actually received. Since the ability to reliably recover capital costs and expenses in water rates is crucial for an agency’s ability to make infrastructure investments, improving the clarity of the Prop 218 process is beneficial for future development of California’s water supply systems.