Coziahr v. Otay Water Dist.

323 Cal.Rptr.3d 441

Mark COZIAHR, Plaintiff and Appellant,

v.OTAY WATER DISTRICT, Defendant and Appellant.

Mark Coziahr, Plaintiff and Appellant,

v.Otay Water District, Defendant and Appellant.

D081099

D081606

Court of Appeal, Fourth District, Division 1.

Filed July 15, 2024

CONSOLIDATED APPEALS from a judgment of the Superior Court of San Diego County, Eddie C. Sturgeon, Judge. Affirmed in part, reversed in part, remanded with directions. (Super. Ct. No. 37-2015-00400000-CU-MC-CTL)

Artiano Shinoff, Daniel R. Shinoff, Jack M. Sleeth, Jr., San Diego; Hanson Bridgett, Claire H. Collins, Los Angeles, Adam

W. Hofmann, Sacramento, Rosslyn Hummer, Los Angeles, Patrick Burns and Breana L. Burgos, San Francisco, for Defendant and Appellant.

Daniel S. Hentschke, Oceanside, for Association of California Water Agencies, California Association of Sanitation Agencies, California Special Districts Association and League of California Cities as Amici Curiae on behalf of Defendant and Appellant.

Gibbs Law Group, Andre M. Mura, Steven M. Tindall, Oakland; Scott D. Levine, San Diego, and Scott D. Levine for Plaintiff and Appellant.

Ross, Wolcott, Teinert & Prout, William C. O’Neill; Ciresi Conlin, Katie Crosby Lehmann, Kyle W. Wislocky and Patrick A. Cochran for Mesa Water District as Amicus Curiae on behalf of Plaintiff and Appellant.

IRION, J.

Plaintiff Mark Coziahr brought a class action against the Otay Water District (Otay), alleging Otay imposed tiered water rates on single-family residential customers (SFRs) that violated a constitutional requirement added by Proposition 218 known as Section 6(b)(3). (Cal. Const., art. XIII D, § 6, subd. (b)(3).)¹ Under Section 6(b)(3), a property-related fee or charge "shall not exceed the proportional cost of the service attributable to the parcel." The burden is on the local governmental agency to "demonstrate compliance" in a legal action as to fee validity. (Section 6(b)(5).)

After certifying the class, the trial court determined Otay did not meet its burden as to Section 6(b)(3). In a subsequent remedy phase, the court considered proposed refund calculation methods; used a class-wide approach that included all water charges; and indicated it would hold a later individual allocation phase. The court awarded an estimated refund of approximately $18 million, with monthly increases until Otay imposed rates consistent with Section 6(b)(3). The court entered judgment for Coziahr, which stated Otay remained free to use any compliant rate structure.

Otay appeals from the liability decision and damages, while Coziahr appeals only as to damages. On liability, Otay contends the trial court should have accepted its "reasonable, cost-based" approach, and improperly required "perfection." On damages, Otay argues a refund was not authorized by Proposition 218; the trial court did not make a damages finding, and there was no support for one; and the court’s calculations were speculative. Coziahr, on cross-appeal, argues that only the overcharges at the two highest tiers should have been included in the refund calculations, and the court’s method amounted to an unpled and unjustified offset.

We affirm the judgment as to liability, the availability and existence of damages, and the trial court’s inclusion of all charges in the damages calculation. However, we conclude the court’s calculations were unreasonable, and remand for a new trial on the refund amount.

FACTUAL AND PROCEDURAL BACKGROUND

I. Underlying Events

Otay operates a water utility service in southeastern San Diego County. Otay’s water customers are grouped into four classes: single-family residential (SFR), multi-family residential (MFR), commercial, and irrigation.

Otay divides its water charges into two parts: fixed and variable. Fixed charges include "pass-through charges from the San Diego County Water Authority (CWA) and the Metropolitan Water District (MWD)" and the "District system fee," which is based on meter size. According to Otay budgets during the relevant time, pass-through charges cover "construction, operation and maintenance of aqueducts and emergency storage projects," and the system fee is for "water system replacement, maintenance, and operation." Variable charges include water rate charges, energy charges (to cover elevation-related pumping), penalties, and, when applicable, improvement district charges. Variable water rate charges are based on consumption units of one hundred cubic feet (HCF).²

Otay periodically directs consultants to prepare a cost of service study, or rate study. In 2013, Otay retained WS Atkins (Atkins), and in 2017, it retained HDR Engineering, Inc. (HDR) for such studies. Both firms relied in part on water rate cost of service methodologies from an American Water Works Association (AWWA) manual titled, "Ml Manual, Principles of Water Rates, Fees and Charges" (Ml Manual).³

From 2014 to 2017, Otay used a tiered rate structure for all classes of customers, including SFRs. Customers subject to volume-based tiers pay a higher price for water units at each increasing tier. In 2018, Otay made changes to the SFR tiers, and moved commercial and irrigation customers to uniform rates (i.e., no price increase based on volume).⁴ We describe the rate studies used by Otay below.

II. Litigation

A. Class Action Lawsuit Challenging Rates

In July 2015, Coziahr filed a class action complaint and petition for writ of mandate against Otay for violating Section 6(b)(3).⁵ He alleged Otay’s SFR tiered water rates were "arbitrary" and did not "correspond to the actual cost of water service" to the parcel, as required. He sought (i) declaratory relief, (ii) injunctive relief, (iii) restitution damages based on excessive fees, and (iv) a writ of mandate to compel Otay to comply with its mandatory duties and reimburse unlawfully collected charges.

Coziahr moved for class certification. Otay disagreed on the statute of limitations period, to which the parties later stipulated. The trial court certified the class, which was defined as "All singlefamily residential customers of the Otay Water District who received water service" after July 14, 2014. The case proceeded to trial in liability and damages phases.

B. Liability (Phase I)

The trial on liability proceeded as follows. Coziahr filed an opening brief, Otay filed an opposition, and Coziahr filed a reply. The parties also filed expert declarations and/or reports. Otay’s expert was Jason Mumm, an executive consultant at a firm specializing in municipal water rate development. His report included an "independent analysis" of Otay’s rates. Coziahr’s expert was David Vondle, a management consultant with experience in utility-related matters. The rate studies were in the administrative record, which was lodged in the trial court.

In June 2021, the trial court held a hearing at which counsel presented argument. In March 2021, the court issued the Phase I Statement of Decision.

The trial court found Otay "failed to demonstrate by substantial evidence that its 2013 and 2017 tiered water rates were proportional to the cost of service attributable to each customer’s parcel, as required by Proposition 218." The court determined, inter alia, that (i) the SFR tiered rate structures were based on "non-cost objectives such as conservation," and had similar defects to the rate structures used in Capistrano Taxpayers Assn., Inc. v. City of San Juan Capistrano (2015) 235 Cal. App.4th 1493, 186 Cal.Rptr.3d 362 (Capistrano) and City of Palmdale v. Palmdale Water Dist. (2011) 198 Cal.App.4th 926, 131 Cal.Rptr.3d 373 (Palmdale); (ii) the record did not support Otay’s reliance on "peaking factors" (i.e., ratios meant to capture peak versus average demand) to justify its SFR rates; and (iii) Mumm’s post-hoc analysis did not support the constitutionality of Otay’s SFR rates.

C. Damages (Phase II), Posttrial Proceedings, and Judgment

The case proceeded to Phase II, during which the parties proposed different refund calculation methodologies. The parties continued to retain Mumm and Vondle as experts. In June 2022, the trial court issued its Phase II Statement of Decision, awarding an estimated refund of $18,105,256.60 (to increase $208,762.50 monthly, pending compliant rates, and to be adjusted for individual allocations later).

In June 2022, Otay filed an opposed motion for new trial, arguing that damages were unavailable for a violation of Proposition 218. Otay also objected to the proposed judgment on this basis. The trial court denied the motion and overruled the objections.

In August 2022, the trial court entered judgment for Coziahr (filed in January 2023 nunc pro tunc), consistent with the statement of decision for each phase. Otay was "ordered to impose future water rates consistent with .. [Section 6(b)(3)], and may use tiers, a uniform rate, or any other method, provided [Otay] complies" with that section.

Both parties appealed. The Association of California Water Agencies, the California Association of Sanitation Agencies, California Special Districts Association, and League of California Cities (local agency amici), filed an amicus curiae brief on behalf of Otay. Mesa Water District filed an amicus curiae brief for Coziahr. The parties filed answering briefs.

DISCUSSION

I. Otay’s Appeal Regarding Liability

Otay contends the trial court failed to consider whether it made a "reasonable, cost-based" showing under Section 6(b)(3), instead requiring "perfection," and Otay’s evidence was sufficient to prove constitutional compliance. Otay also contends the court erred in applying Capistrano and Palmdale, and made certain other mistakes. We conclude the court used the proper level of scrutiny, it appropriately applied the case law, and that substantial evidence supports its resolution of the disputed factual issues.

A. Proposition 218 and Water Rate Cases

We begin with additional background on Proposition 218, as well as the cases focused upon by the trial court, Capistrano and Palmdale.

1. ...