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HomeMy WebLinkAbout15.a. Receive information from Counsel on recent Prop 218 cases as related to the wastewater industry Page 1 of 4 Item 15.a. ,ek CENTRAL SAN SANITARYCENTRAL CONTRA COSTA , . May 7, 2020 TO: HONORABLE BOARD OF DIRECTORS FROM: ALEX J. MOG, MEYERS NAVE ASSOCIATE KENTALM, DISTRICT COUNSEL REVIEWED BY: ROGER S. BAILEY, GENERAL MANAGER SUBJECT: RECEIVE INFORMATION FROM DISTRICT COUNSEL ON RECENT PROPOSITION 218 CASES AS RELATED TO THE WASTEWATER INDUSTRY At the time the Board reviewed Central San's draft Proposition 218 Notice for the four-year rate increase adopted in 2019, District Counsel was asked to apprise the Board with respect to recent court decisions on Proposition 218 that affect rate setting in the wastewater industry. District Counsel Kent Alm and Alex J. Mog of Meyers Nave have provided the attached memorandum discussing these issues. Mr. Alm will be available at the meting to respond to questions. ATTACHMENTS: 1. Memo from District Counsel May 7, 2020 Regular Board Meeting Agenda Packet- Page 138 of 166 Page 2 of 4 .,efACENTRAL SAN CENTRAL CONTRA COSTA SANITARY DISTRICT April 2, 2020 TO: ADMINISTRATION COMMITTEE FROM: KENT ALM, DISTRICT COUNSEL ALEX J. MOG, MEYERS NAVE SUBJECT: RECENT PROPOSITION 218 CASES In 2019, when the Board reviewed Central San's most recent Proposition 218 ("Prop. 218") notice, it was requested that counsel apprise the Board regarding recent court decisions on Prop. 218 as related to the wastewater industry. This memorandum provides an overview of recent cases that address the application of Prop. 218 and Prop. 26 to public utility rates, and the impact of these cases on sewer service rate setting. As you will see, these cases are a continuation of the trend for the courts to rule on additional varieties of challenges being raised under these constitutional provisions. This is merely a selection of cases that are most directly related to sewer and water rate setting, but there have been a number of additional important Prop. 218 cases dealing with solid waste and municipal power rates that generally fall into the trend for the courts to closely evaluate the factual basis for public agency rates. I. Cases Regarding Cost of Service • Citizens for Fair REU Rates v. City of Redding (2018) 6 Cal. 5th 1 ("Redding") • Glendale Coalition for Better Government v. City of Glendale (2018) WL 6804333, B281994 ("Glendale") Redding and Glendale are two very similar cases. In Redding, taxpayer advocates challenged an annual transfer of funds from the city's electric utility to its general fund as an illegal tax. The Supreme Court explained that because the transfer of funds was not a charge imposed on customers, it was not itself a tax. However, if the rates imposed on customers exceeded the cost of providing electric service, then the rates constituted an illegal tax. The Supreme Court noted that the transfer to the general fund was paid for with non-rate revenue. Therefore, Redding's rates complied with Props. 218 and 26 because the rates did not exceed the cost of providing the electric service. The Glendale case involved the same basic fact pattern. However, in that case, the Court of Appeal held that the transfer to the general fund was paid for with revenue generated from the city's electric rates. Since the transfer of funds was not a cost of providing the electric service, the electric rates exceeded the cost of providing service and violated Props. 218 and 26. May 7, 2020 Regular Board Meeting Agenda Packet- Page 139 of 166 Page 3 of 4 The basic holding in Redding and Glendale, that rates may not exceed the reasonable cost of providing service, is not new. This holding is consistent with a long line of cases involving Prop. 218 and Prop. 26. In fact, Glendale is not even a published decision, signaling that the Court of Appeal did not consider the decision legally noteworthy. II. Challenges to Rate Methodology • Planter v. Ramona Municipal Water District, (2019) 7. Cal. 5th 372 ("Plantes ') In Planter, a customer sued to challenge the method that the district used to establish rates. The district argued that the customer could not sue because he did not submit a protest during the Prop. 218 hearing at which increased rates were considered, and therefore had not exhausted his administrative remedies. The Supreme Court rejected the district's argument and held that a plaintiff challenging the method of a rate allocation does not need to first submit a protest for a Prop. 218 hearing in order to subsequently challenge the method of allocation in court. Although this was the first time the Supreme Court has ruled that submittal of a protest during a Prop. 218 hearing is not a prerequisite to challenging rates, many in the legal community had previously assumed that was the case. Since a majority protest has almost no chance of ever occurring, submitting a protest at a Prop. 218 hearing does not provide a ratepayer an adequate remedy to challenge the rates. Accordingly, the ratepayer may challenge the rates without first submitting a protest. The more significant holding in Planter was the decision's affirmation that the methodology used to spread the charges across the various customer classes can be challenged after any increase in rates, not merely when the underlying methodology or rate structure is modified or adopted. This is potentially significant for all public agencies because it means that every time rates are increased based on an existing rate structure, a ratepayer or customer class may challenge the underlying methodology for spreading the revenue requirement across the various customer classes. III. Challenge to Rates by Referendum • Wilde v. City of Dunsmuir(2018) 29 Cal. App. 5th 158 ("Wilde") • Howard Jarvis Taxpayers Association v. Amador Water Agency(2019) 36 Cal.App.5th 279 ("Amador") Both Wilde and Amador involve the question of whether rates adopted by a public agency can be challenged through the referendum process. In Wilde, the court held that adopted rates were not subject to referendum, while in Amador the court held that adopted rates were subject to referendum. The Supreme Court has taken up review of these conflicting decisions but has not de-published either opinion in the interim. Whether rates are subject to referendum is a legal question that depends on whether rates fall within the definition of "tax" as that term was originally used in the California Constitution, prior to the adoption of Propositions 13, 218 and 26. However, as a practical matter, these cases are insignificant. It is well established that voters have the right to adopt new rates through the initiative process. Accordingly, even if it is not May 7, 2020 Regular Board Meeting Agenda Packet- Page 140 of 166 Page 4 of 4 possible to challenge adopted rates through a referendum, the rates can be indirectly challenged through an initiative that simply establishes new rates. IV. Summary of Importance to Central San Rate Setting None of these cases fundamentally modify the implications of Prop. 218; however, these cases are significant for the degree in which the courts scrutinized the various factors that make up the utility's cost of providing service in order to determine if the revenue generated from the rates exceeds those costs. For example, the decisions in both Glendale and Redding include lengthy discussions of the cities' respective accounting practices and the sources of the funds that comprised the general fund transfers. In this regard, the cases represent a continuation of an apparent trend of courts investigating rates with far greater scrutiny than they have in the past. Courts are no longer willing to defer to public agencies' representations as to the costs of providing service to the ratepayer and are reviewing the basis for the rates in greater detail. It can be anticipated that this trend toward ever more sophisticated scrutiny will continue, and courts will scrutinize in more detail the assumptions used in staff and professional rate studies. Central San's rate studies and staff work have always been of high quality, so we do not anticipate the current rates are particularly vulnerable to a challenge under this increased scrutiny. However, judges generally do not have backgrounds in accounting or rate analysis and there are no statutorily authorized methodologies, so any complex rate structure based on assumptions and allocation among different customer classes may be subject to future judicial scrutiny regarding those assumptions and the methodology. AJM/KA:dma May 7, 2020 Regular Board Meeting Agenda Packet- Page 141 of 166