As reported on Nossaman's Endangered Species Law & Policy blog, on April 1, 2015, Governor Jerry Brown issued a landmark executive order mandating water cutbacks for urban residents to address the state's historic drought. Governor Brown directed the State Water Resources Control Board to "impose restrictions to achieve a statewide 25% reduction in potable urban water usage … as compared to the amount used in 2013." Local agencies may decide how to get customers to reduce consumption, with higher rates being a likely option. The Los Angeles Times (April 21, 2015) reported that between 66 and 80 percent of California water providers already use some type of tiered rates – charging higher per unit rates for higher levels of consumption –  to encourage conservation.

On April 20, 2015, the California Court of Appeal held that the tiered water rate structure used by one of those water providers is unconstitutional.  Capistrano Taxpayers Ass'n, Inc. v. City of San Juan Capistrano (April 20, 2015).  Specifically, the court held that the City of San Juan Capistrano's tiered rate structure violates a requirement added to the California Constitution by Proposition 218, a tax-cutting voter initiative passed in 1996.  The court found the City's tiered rate structure violates the constitutional mandate that fees "not exceed the proportional cost of the service attributable to the parcel" because the City did not demonstrate an incremental higher cost of service proportional to high-consumption water use.   Specifically, the court held that "above-cost-of-service pricing for tiers of water service is not allowed by Proposition 218 and in this case, [the City] did not carry its burden of proving its higher tiers reflected its costs of service."

Governor Brown's response to the court's ruling was unequivocal:  "The practical effect of the court's decision is to put a straitjacket on local government at a time when maximum flexibility is needed. My policy is and will continue to be: employ every method possible to ensure water is conserved across California." 

While some see a straightjacket, others see a life preserver in the court's decision.  Although the court held that the City's water pricing policy is unconstitutional, the court declined to find the City's pricing policy per se unconstitutional, explaining that,

[W]e see nothing in article XIII, section 6, subdivision (b)(3) of the California Constitution that is incompatible with water agencies passing on the true, marginal cost of water to those consumers whose extra use of water forces water agencies to incur higher costs to supply that extra water. Precedent and common sense both support such an approach. 

Tiered rates can be lawful when additional water costs more to supply — for example, if an agency must build a new recycling plant or turn to high-priced sources. But the court said that the Proposition 218 constitutional amendment requires that water rates and other government fees be pegged to the costs of providing the service, and not to other factors such as government's desire to encourage conservation. The court remanded the case to allow the City the opportunity to prepare the calculations necessary to support its tiered pricing structure.

Proposition 218's mandate applies to public water agencies only.  Thus, the court's holding has no immediate or direct effect on the pricing structures of privately-owned water utilities, many of which also have adopted tiered rates to promote water conservation, pursuant to policies adopted by the California Public Utilities Commission.