Is the Palmdale Decision A Game Changer For Davis Water Issues?

Dove-Doug

The Answer Depends On Whom You Talk To

On August 9, 2011, the Second District Appellate Court of California struck down the water rates for the City of Palmdale, located in Los Angeles County, ruling: “After conducting an independent review of the record (Silicon Valley Taxpayers’ Assn., Inc. v. Santa Clara County Open Space Authority (2008) 44 Cal.4th 431, 448), we conclude PWD failed to satisfy its burden to establish that its new water rate structure complies with the mandates of Proposition 218 (as set forth in article XIII D of the California Constitution (article XIII D)), including the proportionality requirement which specifies that no fee or charge imposed upon any person or parcel as an incident of property ownership shall exceed the proportional cost of the service attributable to the parcel. Accordingly, we reverse the judgment.”

The question that has emerged in recent weeks is what that decision will mean for Davis.  There are really two questions embedded within this.  One is a prospective question in that Davis, like all other cities, will have to take this decision into account when it conducts its rate study and ultimately sets its water rates, should the surface water project go forward.

The bigger problem, perhaps, is what if Davis’ current rates are out of line with the Palmdale decision?  The issue there is complex and the answer depends largely on whom you ask.

Many believe that the problems of Palmdale were, in fact, unique to Palmdale because “in this instance, the District failed to demonstrate that the proposed budget based rates for one customer class were proportionate to the cost of providing water service in violation of Proposition 218.”

However, it is important to understand that the court did not invalidate tiered rates.  The court decision, in fact, specifically allowed for tiered rates that were both budget-based and that promoted water conservation, but only if that conservation is attained in a manner that “shall not exceed the proportional cost of the service attributable to the parcel.”

Naturally, the City Attorney Harriet Steiner believes that the current rates, adopted prior to the Palmdale decision, meet current legal standards.

It is also not clear that the Palmdale decision does anything other than apply existing regulations within Prop 218 and their requirements for proportionality to the City of Palmdale, and therefore rules that their rates were out of compliance with the standards set under Prop 218.

Under Prop 218, “The amount of the fee or charge levied on any customer shall not exceed the proportional cost of service attributable to that customer.”

The question really is whether that is the case.

If you look at Davis’ metered rate charges, it is difficult to understand how that could be the case.

water-metered-rates

You basically have huge differences, not in the unit charges of the tiers between user classifications, but at the point of the rate cutoff.

So a single family resident has the higher tier 2 rate begin at 36 ccf.  But a small commercial and industrial up to 1.5 inch meet has the rate cutoff at 115 and a large commercial 2 inches or larger has its second tier begin at 619 ccf.

That is, however, only part of the story.

water-base-rates

There are also fixed costs of a base monthly rate, depending on the meter size.  And so, a larger meter has a much larger base cost.

Doug Dove from Bartle Wells Associates presented the preliminary discussion on the rate study to the Water Advisory Committee last Thursday.  He talked briefly and at various points about the Palmdale decision and its implications.

He told the committee, “With Prop 218, the burden of proof that the rates are proportional and are based on cost of service lies with the water agency.”

Bill Kopper, a member of the WAC, said at the meeting, “While an agency may have tiered rates, they must be the same for all parcels, including residential and commercial, provided the cost of providing water is the same for residential and commercial.”

He argued, “It would also appear that the city’s current rate structure violates that decision – isn’t that right, because before you get out of tier 1 if you’re a commercial user you can use much more water than if you’re a residential user?”

Mr. Dove responded, “I’m not going to comment on the current rate structure because I haven’t looked at the cost of service that that was based on.”

He added, “I feel confident that the Palmdale case resulted from some poor rate analysis and some poor decisions that were made by the district during the rate study process and also looking at the rates that were approved, it’s pretty obvious that you can argue that they were not proportional.”

Mr. Kopper responded, “The case did lay down the law, so then the question becomes how is it applicable here – but the cost for providing, wouldn’t you agree, [would] be the same for all parcels in the city of Davis?  It’s all potable water and it’s all coming through the same system.  How could the cost of delivery be different between a commercial user and a residential user in the city?”

“Water is essentially the same,” Mr. Dove responded, “but sometimes people need a lot of more of the water at a single time than other people – in other words a peak, so that can influence the cost of water.”

“I think it’s pretty clear that tiered rates are legally on solid ground.  I think water budgets are legally on solid ground,” he continued.  “It’s a matter of applying those proportionally to the different user classes.”

He argued that in Palmdale they “basically weren’t being proportional or fair.”

A water budget is a situation where each customer is provided a water budget based on needs.  An indoor budget which would be based on the number of people would be the lowest rate.  An outdoor budget which is based on size and weather, would have a middle rate.  And a water use over budget would have the highest rate.

The price per unit increases as water use exceeds the budget.

water-budget

Bill Kopper would later ask, “You don’t believe that you could legally do this in light of the City of Palmdale decision?”

Mr. Dove responded: “In the rate making community there isn’t a feeling that the water budget concept is at risk by the Palmdale decision.  What happened in Palmdale is a bad rate structure and it didn’t withstand the court challenge.  But it wasn’t the underlying water budget concept of the rate, [that] was not at fault.  It’s still a sound concept.”

The discussion will be brought up at a future meeting date and the request was made by the WAC to have an attorney other than the city attorney advise the group.

Michael Bartolic argued, “If we do have a discussion on Palmdale could we please have an informed water lawyer provide that presentation under consultation to the city?  I feel it needs more – the city attorney already advised the council in August, in September, and in December and no change was made in our rate structure by the city council based on her advice.  So I don’t feel we’ll get anything other than a canned response.”

Staff assured the committee that the lawyer coming would be a water lawyer who specializes in Prop 218 issues.

As I stated at the start of this piece – and this piece is far from the definitive word or the end of the story – the answer about the current rates depends on whom you ask.  I think Mr. Bartolic brought up an important point that in fact underlies a lot of problems with the way we utilize a city attorney in this community.

There is an inherent conflict in the attorney rendering an opinion and defending her opinion legally.  The WAC recognized this inherent problem, and moved to avoid a possible conflict.

The city is basically arguing that the cost of providing water per unit is more expensive for residential, because residential has more peak use demand and a more variable demand.

There is a larger fixed cost for larger meters, but that does not necessarily solve the problem that the initial usage allows for a much lower rate for a much longer period of time.  Residential users are paying more for water storage tanks and other peak use costs.

Others have told me that they do not believe we will be able to justify differential rates based on peak hours, as staff suggested to the committee.

This discussion will obviously frame future discussions on the rate study, but it may also impact residents if the city has to fix their current rate structures retroactively.  Obviously, everyone on staff has an interest in avoiding that, and that makes bringing in independent eyes all the more important, to get at the truth.

—David M. Greenwald reporting

Author

  • David Greenwald

    Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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Budget/Fiscal

78 comments

  1. Good article David. There is absolutely no question that the Palmdale decision is going to affect rate discussions and rate structures throughout the state; however, when Bill Kopper said at the meeting, [i]”While an agency may have tiered rates, they must be the same for all parcels, including residential and commercial, provided the cost of providing water is the same for residential and commercial.”[/i] he was only looking at the Palmdale language from a single (somewhat restricted)perspective.

    Lets take a look at that same language from a slightly different perspective . . . specifically the perspective that Bob Dunning and you have discussed in the past. From that perspective a user class is not a parcel, but rather an individual. As Bob has argued so eloquently, “[i]Why should the rate per gallon of water be different for his fourth child than for his first child?[/i]” Similarly, one can ask, [i]”Why should the rate per gallon of water be different for a foster child than it is for a biological child?[/i]

    There will be plenty of legal discussion about how to be sure that rates are proportional and are based on cost of service.

  2. One aspect of the [i]Palmdale[/i] that is important to remember. Like the Ninth Circuit decision regarding Prop 8, the [i]Palmdale[/i] decison is very “narrow.”

    The narrowness of a decision affects how applicable it is across a broader spectrum. There has been a lot of discussion about whether SCOTUS will even consider the Prop 8 decision because of its narrowness. Time will tell just how broadly the details of Palmdale will be applied.

  3. The Davis business community,most especially the restaurant sector which is a major part of local downtown economic activity, is already wary of the impact that the surface water project will have on their bottom-line. The bogus 14% rate increase proclaimed by the city was,IMO, directed primarily towards molllifying their concern. This decision raises the specter of additional costs to their businesses.

  4. [quote]One is a prospective question in that Davis, like all other cities, will have to take this decision into account when it conducts its rate study and ultimately sets its water rates, should the surface water project go forward.[/quote]

    Davis will have to take Palmdale into account no matter what water project goes forward! Any rate structure that Davis implements must be proportional, and does not depend on water water project is chosen. Even if we stay the course with our current well water system, our rate structure must still be proportional under Palmdale.

  5. [quote]Obviously, everyone on staff has an interest in avoiding that, and that makes bringing in independent eyes all the more important, to get at the truth.[/quote]

    This is not about getting at the “truth” of anything to create a “gotcha” moment. Remember, Palmdale is a RECENT case (in other words city staff did not have Palmdale to go by in making any decisions), with a narrow set of facts, so it is not even clear Palmdale will be applicable to much of anything. This is about making sure that prospectively, the rates going forward are proportional as required under Prop 218.

  6. [quote]The Davis business community,most especially the restaurant sector which is a major part of local downtown economic activity, is already wary of the impact that the surface water project will have on their bottom-line. The bogus 14% rate increase proclaimed by the city was,IMO, directed primarily towards molllifying their concern. This decision raises the specter of additional costs to their businesses.[/quote]

    I was on that committee. I am not a business person, and I am in no way affiliated with the business community. Everyone around that table was attempting to find some way to reduce the water rate increases for EVERYONE. They were just unmanageably high for every class, where it was residential or commercial. The 20% water conservation assumption built into the proposed rate structure was clearly stated in the Prop 218 notice, which has been noted in the blog by Matt Williams again and again. You are entitled to your opinion, but not your own set of facts!

  7. Palmdale is a recent case but it’s not clear it does anything more than apply the proportionality requirement of Prop 218, which means that if the city’s rates are found retroactively to be disproportionate, the city could be on the hook.

  8. The problem in deciding whether the current rate structure is proportional is fully understanding the rationale behind the actual figures, including peak demand, economies of scale, and various other factors that go into determining proportionality. There may or may not be good reasons for the rates to be structured the way they were. In Palmdale, the rate structure was clearly and patently unfair. The city as a class was kicked into the higher priced tier once it reached 130% of its water budget allocation, whereas other classes (residential, commercial) had to reach 160% (or greater) of their water budget allocation before they were kicked into the higher priced tier. There was absolutely no rhyme or reason given for this disparity, either prior to court or in the courtroom. It was clearly a disproportional rate structure. It is not clear that Palmdale will apply to any other city, unless that city had the exact same sort of unfair rate structure. One thing I think a city may be able to take from the Palmdale case is that it should have a clear RATIONALE behind its rate structure that verifies it is proportional under Prop 218.

    The city has now hired a professional consultant to do a rate study, and that rate study and any rate structure that is proposed will be carefully scrutinized to ensure it is proportional as required by Prop 218. I’m sure that there will be a clear rationale to verify that whatever rate structure is selected will be proportional as required under Prop 218 and the Palmdale decision.

  9. Elaine, I don’t think David is arguing for compensation, simply pointing out that that is a possibility. Even with the decision in place the City of Palmdale and the Palmdale Water District are wrangling about compensation, and have very different perspectives on what the decision’s guidance on that subject is.

  10. I said possibly.

    [quote] In August 2011, The City of Palmdale filed a claim seeking more than $3 million in financial reimbursement from the Palmdale Water District (PWD) from charges that were collected through the Water District’s illegal rate hike, which began in July 2009.

    [/quote]

    source ([url]http://www.examiner.com/neighborhoods-in-bakersfield/city-of-palmdale-still-waiting-for-3-million-refund-from-palmdale-water-dist#ixzz1nnJk0cKG[/url])

  11. First of all, just because the city of Palmdale filed for financial reimbursement does not mean they will get it. Secondly, it is not clear in any way shape or form that Palmdale applies to any city other than Palmdale. I will repeat, the only thing I think you can take away from the Palmdale decision is that a city should have a rationale to verify any rate structure it institutes is proportional as required by Prop 218.

  12. Here are some experts the WAC could contact: [url]http://www.acwa.com/content/region-8/region-8-forum-agenda-highs-lows-water-rate-changes-deeper-look-prop-218[/url]
    I also suggest the city and/or the JPA consider joining the Association of California Water Agencies. Like similar groups, the legislative analysis and legal services would probably be of considerable benefit. They have the experts, or know the experts, who can help construct rate structures.
    [url]http://www.acwa.com/[/url]

  13. I’ll try to get back to this conversation later today or tomorrow when I have time, but the peak hour water use argument was really a stretch. The percentage of the total cost of water attributable to temporarily storing some water in the water tank and repumping during peak hours is miniscule compared to the total cost of procuring and distributing the water. I don’t think it would even be detectable. And different classes of commercial have as much peak hour differences as residential and commercial do.

    I would go further and say that fixed costs are difficult to reconcile with Prop. 218, while conservation rates are not as difficult to reconcile. That is because it is the total amount of water used that drives the infrastructure expense, not the number of units in the city.

    To illustrate: If we had 25,000 units, but they each used only 1 gallon a day, we might be able to get by with 1 or 2 wells, rather than over 30 wells and the new surface water project. Hence, our fixed costs would be very low.

    Charging a constant rate per gallon used satisfies prop. 218. Bob Dunning has said that it satisfies him, and it does not penalize retired people on fixed incomes to the extent that high fixed costs do. It also encourages conservation when the rate is very, very high as it will be.

    Fairness is obviously going to be a huge ongoing political issue as rates sky rocket.

  14. [quote]the peak hour water use argument was really a stretch. The percentage of the total cost of water attributable to temporarily storing some water in the water tank and repumping during peak hours is miniscule compared to the total cost of procuring and distributing the water. I don’t think it would even be detectable.[/quote]

    From: [url]http://files.dnr.state.mn.us/waters/watermgmt_section/appropriations/reducing_peak_demands.pdf[/url]

    [quote]Water treatment plants and facilities are typically built to supply demands that are two, three and even four times larger than average daily demand on the system. This excess capacity is needed only a few days each year and adds significant costs to the design, construction and operation of a water system… Increasing block (rates that increase as consumption increases) rate structures and seasonal surcharges (higher rates during months with peak demands) are examples of rate structures that can be used to reduce peak demands and encourage efficient water use. Customers that use more water and contribute to peak demands on the system would pay higher water bills…[/quote]

  15. [quote]I would go further and say that fixed costs are difficult to reconcile with Prop. 218, while conservation rates are not as difficult to reconcile. That is because it is the total amount of water used that drives the infrastructure expense, not the number of units in the city. [/quote]

    There are fixed costs common to all users that have nothing to do with water consumption, e.g. billing.

  16. [quote]To illustrate: If we had 25,000 units, but they each used only 1 gallon a day,…[/quote]

    I’m not following you here… people cannot be expected to use only a gallon of water a day!

  17. [quote]Charging a constant rate per gallon used satisfies prop. 218. Bob Dunning has said that it satisfies him, and it does not penalize retired people on fixed incomes to the extent that high fixed costs do. It also encourages conservation when the rate is very, very high as it will be. [/quote]

    Who said anything about “high fixed costs”? I’m not sure where you are getting this from. Please explain…

    [quote]Fairness is obviously going to be a huge ongoing political issue as rates sky rocket.[/quote]

    By “fairness” do you actually mean proportionality?

  18. “First of all, just because the city of Palmdale filed for financial reimbursement does not mean they will get it.”

    Elaine: I said possibly. You asked me to cite my source, I did. I said nothing more than it was a possibility and it is a possibility.

  19. David G: great article!

    As Bob Dunning says, what a target rich environment … where do I start?

    Matt: the Palmdale decision does not make new law; it only applies existing and clear California Constitutional Law to the facts of a tier system much like that used by Davis. Basically, it ties it all up in some easy and understandable reading. We all know that you cannot sell water for more than it costs to procur it. Period.

    Davis clearly overcharges residential to subsidize commercial, and has for a very long time. (Anyone have the historical timeline for when we went to the subsidy?)

    For me, the only question I have left is one: is the residential ratepayer class entitled to a refund? If so, how far back? I think that the City would be on the hook for that refund, not the subsidized commercial class since they did not set up the unconstitutional system: the City did it.

    BTW, our City Attorney (yes, the one in the middle of the DACHA mess) twice certified to her client (ie, the City and its ratepayers) that the Sept 6th and Dec 6th rate structures were legal and consitutional. Not correct, and it is obviously not correct.

    If the CC does not get on this right away and fix it, I think some ratepayers should sue the City to fix the rates, and to obtain a refund for the residential class. The case would be a class action by the residential class, with some representative individual plaintiffs.

    If anyone wants to discuss this with me, my email is michael@mikeharringtonlaw.com, or call 759-8440.

  20. [b]@Mike Harrington:[/b]The Palmdale decision was published only recently. I think we should be looking at our rate structure going forward, not looking back, both in terms of fairness and compliance.

    [quote]There are fixed costs common to all users that have nothing to do with water consumption, e.g. billing.–[b]E. Roberts Musser[/b][/quote]Elaine, that expense is trivial. I think we should reexamine the entire concept of “fixed cost” billing. The infrastructure costs can be more reasonably paid on a per gallon basis. That’s why we have now have meters.

  21. Sue: so, are you going to move to fire the City Attorney who did this to us? She has been certifying these bad rates for years; the point I made about Palmdale is that she must have had that decision in August 2011, yet she STILL certifed those bad rates, twice (Sept 6 and Dec 6th).

    To date, we have three attorneys on the CC, two of whom claim to be water attorneys, and nothing has been done about the staff setting up the Sept 6 and Dec 6th votes to certify those rates, and currently defending their decisions and conduct.

    Will the water attorney who will advise the WAC write a report and reach some conclusions? Or will it be a political white wash, like what we get from the City Attorney, over and over? (The same one who opined that the water referendum was illegal.)

    Should the WAC ask the CC to refer this matter to the Yolo County Grand Jury? Actually, that might be quite interesting …

    I think that the independent judiciary should have the opportunity to setting the record straight, since the City of Davis is still trying to cover it up and hood wink the WAC and the public.

  22. Dear Residential Ratepayers: we are not talking about pocket change, here. The conduct of staff in presenting these unconstitutional rates to the CC for certification and approval as legal and fair and accurate has cost residential ratepayers millions upon millions of dollars over the years. Maybe the WAC will ask staff for an estimate of the overcharges for just the last 10 years?

    So Sue, I am interested in moving forward and fixing the rates to conform to law, but there has to be some accountability here, and the City should refund those overpayments back to some point in time. So far, not a single member of Davis City Government is talking about either one, so that is why I think the residential class should look into a case against the City.

  23. The question you should have is should the commercial ratepayer class be made to pay up, how far back?

    Rather than asking for a refund for residential meters, which would create a deficit and then we would end up having to raise all rates make up for that deficit just to get back to square one, how about going back and asking the commercial meters to pay what residential meters have been paying. Wouldn’t that be fair too? Why look at the commercial rates as the base, but rather the residential rates as a base. Mike, take your commercial bill and figure out what you should have been paying all along and send it in.

    Next question, why sue ourselves? We would only have to pay more to resolve the effects of the lawsuit, wiping out any perceived short-term benefit and satisfied egos.

  24. Sue Greenwald

    [i]”Elaine, that expense is trivial. I think we should reexamine the entire concept of “fixed cost” billing. The infrastructure costs can be more reasonably paid on a per gallon basis. That’s why we have now have meters.” [/i]

    Sue, I respectfully disagree. What you have just described is a “100% Variable Rate Structure.” Such a structure is [u]guaranteed[/u] to break, and break very quickly. The reason is simple, and goes as follows:

    Assume for the moment that the total costs of the system are $2.00 and that those costs are split 50/50 between Fixed Costs and Variable Costs. So that means this hypothetical system has $1.00 in Fixed Costs and $1.00 in Variable Costs. Per your suggestion you set up a 100% Variable Rate Structure that generates $2.00 in Revenue based on the expected meter readings. So far so good. $2.00 in Revenue balances $2.00 in Total Costs and there is no surplus or deficit.

    Now fast forward to the actual meter readings, where due to conservation efforts the consumption of water is reduced 20% from expected. Therefore your billed Revenue is $1.60 which offsets your costs. The Fixed Costs don’t change from $1.00 and the Variable costs are reduced 20% from $1.00 to $0.80. Total Costs are $1.00 plus $0.80, which when added to the Total Revenues of $1.60 produces a $0.20 deficit.

    If we were expecting consumption to increase, your proposed 100% Variable Rate Structure would produce a surplus, but realistically do you expect Davis’ water consumption in coming years to go up or down Sue?

  25. The fixed costs for delivering water are substantial. The cost of the wells and pipes for to move the water from the wells to everyone’s house is fixed, regardless of how much water you use. The debt costs incurred to build the system is fixed, regardless of water usage. Each water user should be charged a fixed monthly cost which covers an ratable share of fixed costs, then a variable cost, based on water used. It is the only fair way to charge for having water available to a parcel, and for the variable cost of delivery.

  26. Michael Harrington said . . .

    [i]”Matt: the Palmdale decision does not make new law; it only applies existing and clear California Constitutional Law to the facts of a tier system much like that used by Davis. Basically, it ties it all up in some easy and understandable reading. We all know that you cannot sell water for more than it costs to procur it. Period.”[/i]

    Michael, the reality is that in this case the existing California Constitutional Law is anything but clear. The rate structure you are advocating for treats individual Californians differently. It means that you will be charging Bob Dunning’s fourth child more per gallon for water than you are charging his first child. I want to be there when you try and convince Bob that what you are advocating for is fair. Talk about a target rich environment … where do I sign up for a ticket? That will be great entertainment!

  27. Michael Harrington said . . .

    [i]”Should the WAC ask the CC to refer this matter to the Yolo County Grand Jury? Actually, that might be quite interesting …”[/i]

    Spoken like a Circus Barker. I think you have missed your calling Michael.