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March 30 — Groundwater extraction fees imposed on a water retailer in a California water district's service area did not violate a requirement in the state constitution that new fees be approved by the voters, the state's intermediate appellate court ruled.
A unanimous panel of the California Court of Appeal, Sixth Appellate District, concluded in a March 26 opinion that although the fee the Santa Clara Valley Water District imposed on Great Oaks Water Co., which operates wells in the area, is property-related under Article XIII D of the California Constitution, it is a charge for water service and therefore exempt from the voter ratification requirement.
The court of appeal also held that the procedures the district followed satisfied provisions in the state constitution requiring notice and comment for new fees and reversed the trial court, which had awarded a $4.623 million refund of the charges paid by Great Oaks.
Great Oaks had claimed in its January 2006 amended complaint that the water district improperly used the fee for purposes not authorized by the Santa Clara County Water District Act, such as flood control and revenue pooling. The company also claimed the fee amounted to an improper tax because the water district did not first obtain voter approval as required by Article XIII D. The voter approval provision does not apply to fees for water services. Great Oaks sought declaratory and injunctive relief and a refund of the charges it paid.
This is the second ruling by the California Court of Appeal on the Article XIII D issue in the past two weeks. On March 17, a unanimous panel of the Second Appellate District ruled that the pumping fees the city of San Buenaventura paid are not property-related and not taxes subject to the article's requirements (City of San Buenaventura v. United Water Conservation Dist., 2015 BL 71642 (Cal. Ct. App. 2015)).
The state legislature created the water district through the 1951 Santa Clara County Water District Act. The law directs the water district to, among other things, reduce overdraft and saltwater intrusion and authorizes it to create zones and impose fees to benefit water in those zones, and cover operating costs and activities, according to the court of appeal.
The water district manages dams, reservoirs, treatments plants, nearly 400 acres of groundwater recharge ponds and more than 275 miles of streams, and provides wholesale water to municipalities and private water retailers that deliver drinking water directly to homes and businesses in Santa Clara County, according to its website.
According to the opinion, the water district is divided into two zones—W-5, where Great Oaks operates three wells, and W-2, where it operates 16 wells.
After conducting three hearings in April 2005, the water district adopted for water year 2005–2006 a $420 per-acre-foot charge for non-agricultural use and $42 for agricultural use in W-2 and charges of $215 and $21.50, respectively, in W-5. The state water code requires lower charges for groundwater used for agriculture (Wat. Code, § 75594).
Great Oaks challenged the charges, claiming the agency was “illegally using pump tax revenues for purposes outside the four statutorily specified uses, and that to cover those unauthorized expenditures the amount of the pump tax is excessive.” The district did not respond to the claim, resulting in its rejection in July 2005.
In addition to awarding a refund, the Santa Clara Superior Court found that the water district failed to comply with the voter approval requirement.
The water district appealed to the state's intermediate appellate court.
The court of appeal first found that the charge is property-related, reasoning “that any charge on the extraction of groundwater will typically place a direct burden on an interest in real property and is thus incidental to property ownership.”
Although Great Oaks argued the water services exception does not apply because the charge is for groundwater production, rather than delivery, the court of appeal concluded that the exception applies to the charge. It found that there “is no material distinction between these purposes,” and therefore “the charge was generally subject to Article 13D, but was exempt from the requirement of voter ratification.”
The court of appeal also found that the district's notice and hearing procedures satisfied the constitutional requirements and government code.
As to the refund awarded by the trial court, the court of appeal found that Great Oaks had failed to claim a right to a complete refund of the groundwater charge in its administrative challenge brought before its lawsuit. Therefore, it cannot recover the amount awarded by the lower court.
Lastly, the court concluded that nothing in the record supported a finding that the charge was arbitrary and capricious and the record could not support a finding that the water district misused proceeds from the charges in violation of the district act.
It remanded for consideration of these issues and a more deferential and restrictive judicial review on the part of the trial court.
Joseph M. Quinn and Adam Hofmann of Hanson Bridgett LLP, San Francisco, and Stanly T. Yamamoto of the Santa Clara Valley Water District's Office of District Counsel represent the water district.
Jeffrey S. Lawson of the Silicon Valley Law Group, San Jose; Robert K. Johnson and Omar F. James of Johnson & James LLP, Aptos, Calif.; and Timothy S. Guster of the Great Oaks Water Company represent Great Oaks.
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