Upgrading Conservation Pricing Proposition 218, Smart Meters, And The Step Beyond Tiered Rates

Bryan Barnhart
LL.M., McGeorge School of Law, University of the Pacific
J.D., UC Hastings College of the Law

&

Rebecca Anderson Smith
Associate Attorney, Downey Brand
J.D., Notre Dame Law School

Jan. 3, 2014

Proposition 218 is pushing California’s conservation-pricing programs to evolve. Conservation-pricing programs use price signals to discourage the waste of water. Currently, such programs commonly rely on tiered rates. Customers pay a flat fee for a “basic use allocation,” which “provides a reasonable amount of water for [each] customer’s needs and property characteristics.”¹ Once the basic use allocation is exhausted, a higher rate is charged for each additional unit of water consumed.² Tiered-rate programs have proven effective even when per-unit price increases are small. Historically, both California’s Legislature and its courts have favored such programs, finding them consistent with Section 2 of Article X of the State’s Constitution, which states that “the conservation of [the State’s] waters is to be exercised with a view to the reasonable and beneficial use thereof.”³

Tiered-rate programs’ constitutionality was called into question, however, by the 1998 passage of Proposition 218, which prohibits public agencies from imposing any fee or charge “upon a parcel or upon a person as an incident of property ownership” that is more than “the proportional cost of the service attributable to the parcel.”⁴ Proposition 218 does not say what evidence is necessary to prove that a fee or charge satisfies its proportionality requirement. At a minimum, however, courts require a “defensible and consistently applied” analysis that credibly quantifies actual parcel-specific costs.⁵ In its 2006 decision Bighorn-Desert View Water Agency v. Verjil,⁶ (Bighorn) California’s Supreme Court held that Proposition 218 applies to water-delivery charges.⁷ And in 2011’s City of Palmdale v. Palmdale Water Dist.,⁸ (City of Palmdale) the Court of Appeal held that a tiered-rate program that imposed a “dramatically higher and disproportionate” pricing structure on irrigation customers than it did on municipal and commercial customers violated Proposition 218’s proportionality requirement.⁹

Neither Bighorn nor City of Palmdale addresses the constitutionality of all tiered-rate programs, and it remains possible that California’s appellate courts will hold that such programs do not violate Proposition 218. But at least one Superior Court has reached the opposite conclusion. This August — in Capistrano Taxpayers Assoc., Inc. v. City of San Juan Capistrano¹⁰ (CTA) — Superior Court Judge Munoz relied on City of Palmdale to invalidate a traditional tiered-rate program because the city did not prove that its tiered-rate “increases were proportional to the costs of providing water services to its customers.”¹¹

If Judge Munoz’s decision is upheld on appeal, water agencies’ challenge will be to devise new types of conservation-pricing programs that achieve the policy goal of discouraging waste while still complying with Proposition 218’s cost-of-service mandate. Modern smart-meter technology may help water agencies meet this challenge. Smart meters electronically gather and transmit consumption data to a control center, allowing agencies to track both how much water consumers use, and when they use it. By cross-referencing consumption data against the cost of water and energy at the time that consumption occurs, the agency can calculate each parcel’s time-specific water-delivery costs.

Time-specific pricing would use market forces to encourage conservation. Energy costs the most during peak-use hours. Residential customers’ peak-use hours for water and energy are the same: the morning and evening hours when they are awake at home. Price-driven water-usage reductions during peak-use hours should encourage an overall decrease in consumption — few people will rise at 2:00 A.M. to shower at off-peak rates. Time-specific pricing also would incentivize customers to consume less during times of scarcity. Rates would spike when providers must purchase water at open-market premiums, or resort to energy-intensive supplies such as groundwater pumping. The time-specific cost differences in energy and water may prove minimal. But water agencies’ experience with traditional tiered-rate programs indicates that even tiny variable-price increases are effective at decreasing consumption.

Now may be the time for water utilities to retool to implement time-specific pricing. Utilities that already use smart meters to find leaks in their water-supply infrastructure can repurpose the data that those meters collect. And utilities that are not yet technologically capable of implementing time-specific pricing can install smart meters when they comply with California’s requirement that all residences install water meters by 2025.

Conservation pricing is poised for a big step forward. Smart-meter technology can leverage Proposition 218’s proportionality mandate as the mechanism through which conservation is encouraged. While no court yet has evaluated a time-specific program, the cost-of-service focus of cases such as Bighorn, City of Palmdale, and CTA suggests that such programs may be conservation pricing’s future.

Excerpted with license from the California Water Law & Policy Reporter, Copyright © 2013, 2014, Argent Communications Group. All Rights Reserved. For any additional use contact ACG: 530-852-722; email: reporters@argentco.com.

¹Water Code § 372, subd. (a)(2).

²Water Code § 372, subd. (a)(4).

³See Cal. Water Code §§ 350-389; see also Brydon v. East Bay Municipal Utility District (1st DCA 1996) 24 Cal.App.4th 178 at pp. 192-193.

⁴Cal. Consti. art XIIID, § 2, subd. (e), § 6, subd. (b).

⁵Id. at p. 1088.

⁶(2006) 39 Cal.4th 205.

⁷Id. at pp. 216-217.

⁸(2nd DCA 2011) 198 Cal.App.4th 926.

⁹City of Palmdale v. Palmdale Water District, 198 Cal.App.4th 926, 936-937 (2011).

¹⁰Capistrano Taxpayers Assoc., Inc. v. City of San Juan Capistrano, Case No. 30-2012-00594579-CU-PT-CJC, (Orange County Sup. Ct. August 6, 2013) (link to decision available at http://www.capotax.org/contact-us/news).

¹¹Capistrano Taxpayers Assoc., Inc. v. City of San Juan Capistrano, Case No. 30-2012-00594579-CU-PT-CJC, Proposed Order at 2-3 (Orange County Sup. Ct. August 6, 2013). http://www.capotax.org/contact-us/news.