A ruling by a county judge could mean the Santa Clara Valley
Water District will owe millions of dollars in refunds for
groundwater charges to thousands of local well owners including the
city of Morgan Hill, and that the public agency may have to
significantly raise rates paid by agricultural water users in South
County.
Morgan Hill
A ruling by a county judge could mean the Santa Clara Valley Water District will owe millions of dollars in refunds for groundwater charges to thousands of local well owners including the city of Morgan Hill, and that the public agency may have to significantly raise rates paid by agricultural water users in South County.
While those determinations won’t be made at least until after the second phase of the lawsuit Great Oaks Water Co. vs. the SCVWD, Santa Clara County Superior Court Judge Kevin J. Murphy said Thursday the district violated Proposition 218 – a state constitutional amendment approved in 1996 – by failing to secure voter approval for groundwater extraction charges it collected from water retailer Great Oaks in 2005-2006. Furthermore, the judge’s ruling says the district violated the Santa Clara Valley Water District Act, which is the state law that created the organization, by illegally spending funds collected from water charges for unauthorized purposes.
Even though only one customer was directly involved in the lawsuit, lawyers for both sides said the district has used the same process to set and collect fees from all of its customers since 2005.
“We think this decision will have a large effect on all 4,000 well owners in Santa Clara County, including the city of Morgan Hill,” said Great Oaks General Counsel Tim Guster. “We have also challenged the charge each year since (2005-2006). They’re doing it again right now, it’s exactly the same process they use every year.”
He said the second phase of the lawsuit, which will decide monetary damages for Great Oaks, will proceed in the next couple of weeks.
Great Oaks, a well owner and water retailer which serves about 100,000 customers in south San Jose, will seek a refund for the groundwater charges it paid in 2005-2006, which comes out to about $5 million, Guster said. He said it will also seek reimbursement of all fees it has paid each year since then.
In the current fiscal year, the water district budgeted about $72 million of revenue it will collect from groundwater charges.
Great Oaks argued in court that the district overcharged them for water extracted from Santa Clara County’s natural aquifers, and the extraction fees were illegal.
For now, the district, whose legal staff disagrees with the decision, doesn’t plan to change the process in time to set rates for the next fiscal year, which starts July 1. Chair of the district’s board of directors Sig Sanchez said he expects the district to appeal the decision, though board members have not yet been fully briefed on Thursday’s decision.
“If we’re going to appeal the judge’s ruling we’re probably going to continue to collect the fees until the issue is finalized,” Sanchez said.
That includes continuing as planned with public hearings to consider a staff recommendation to raise groundwater charges for South County municipal and industrial users from $275 to $285 per acre foot. An acre foot is about how much water a family of five uses in a year.
The South County public hearing on groundwater charges will take place 7 p.m. May 6 at the Morgan Hill Community and Cultural Center at the corner of Monterey Road and Dunne Avenue.
Thursday’s ruling could also have a vast impact on local agricultural users, who currently pay $16.50 per acre foot of water. One way in which the district violated the state act which created the public agency was by unfairly charging the different levels of users for the same volumes of water extracted from the same groundwater basin, which extends from Gilroy to Los Altos. The judge said higher-paying customers have been subsidizing the lower-paying customers.
North County customers, for example, currently pay $520 per acre foot.
District spokeswoman Susan Siravo said it is possible that following future hearings and appeals of the Great Oaks decision, the district could be ordered to change the process by which it sets and collects rates.
Local farmers are worried that could include substantially raising rates for agricultural and South County municipal customers.
George Chiala Farms of Morgan Hill expects to pay the SCVWD about $25,000 for water this year, according to manager Ian Teresi. At the current rate, that means the farm expects to use about 1,515 acre feet of water. By contrast, the city of Morgan Hill has budgeted about $2.3 million for about 8,400 acre feet of water purchases from the district in the current fiscal year.
Tim Chiala said any water rate increase is a hardship for local farmers, who are facing ongoing difficulties related to growing costs of doing business and competition from cheaper, lower-quality producers overseas.
“We don’t like to see the rates go up at all because we can’t adjust our price,” Chiala said. “We’re driven by the market. The local farming community is really concerned about keeping farms open, and the best way to do that is help farmers stay in business.”
Grass Farm, a sod farm in Morgan Hill, will use about 500 acre feet of water worth about $8,300 this year, according to production manager Erin Gil. He said if the water district brings agricultural rates in line with those of municipal users, then farmers in Santa Clara Valley will go out of business “on a grand scale.”
Many who complain about the sizable discrepancy in rates don’t understand that agricultural customers pay large costs on top of water purchases from the district, Gil said.
Specifically, farmers also pay for the electricity to run pumps to extract water from their own wells, maintenance for those wells, plus other expenses related to delivering the water to acreage that is scattered throughout the valley, Gil said. For municipal and industrial water users, those costs, which are rising, are incorporated into the rate per acre foot of water.
The city of Morgan Hill, a retailer who has about 12,000 water customers, has also expressed their concern with the legality of groundwater charges to the district in recent years. In May 2008, City Manager Ed Tewes sent the board a letter stating that position.
“Although the voters amended the California Constitution to regulate property related fees in 1996, it was only in 2006 that the California Supreme Court made clear that water charges are property related fees,” the city’s letter said. Furthermore, Tewes cited another case, Pajaro Valley Water Management Agency v. Amrheim, that said the district cannot set different fees to subsidize lower-paying users.
The judge Thursday cited the Pajaro case to support the ruling that the district has not complied with Prop 218.
Board member Rosemary Kamei noted that other aspects of the judge’s decision validated the district’s management of the underground aquifers, which includes keeping them full of imported water through pumps and percolation ponds. Doing so has made the ground safer, reducing the likelihood of subsidence or sinkholes.
County Supervisor Don Gage, who plans to run for a seat on the water district’s board of directors in 2010, said the decision shows how careful public agencies must be when setting fees.
“You have to do your due diligence, especially when you’re collecting fees,” Gage said. “If you don’t do it right, you’re going to get tagged.”
Prop 218 addresses the use of “property related fees” imposed by public agencies in California.
The water district argued that the groundwater fees charged to Great Oaks should not be considered property related fees because the company used the water for business purposes. The judge disagreed, and said that by the terms of Prop 218 the groundwater fees required voter approval, which the district has never sought.
“We are disappointed,” Senior Assistant District Counsel Emily Cote said. “(The decision) does not provide us the detailed guidance we need to understand how to move forward from here. We really felt as though we were complying with the law, and the fact that that wasn’t understood is troubling.”
