Fourth District Court of Appeal Rejects City of San Diego’s Methodology for Tiered Rates

08.14.2025

On July 30, 2025, the California Fourth District Court of Appeal (“Fourth District”) rendered its opinion in Patz v. City of San Diego, which affirmed the lower court’s decision that the City of San Diego’s (“City”) tiered water service rate (“Tiered Rate”) structure for water users violates Proposition 218’s proportionality requirement.

Proposition 218 and Recent Court Opinions Restrict Usage of Tiered Water Rates

California voters enacted Proposition 218 in 1996, which added articles XIII C and XIII D to the State’s Constitution to provide procedural and substantive limitations to affect how public agencies levy and collect existing and future taxes, assessments, and property-related fees and charges. Article XIII D, section 6(b)(3) of the Constitution (“Section 6(b)(3)”), provides that public agencies implementing property-related fees “shall not exceed the proportional cost of the service attributable to the parcel.” The burden is therefore on public agencies to justify the proportionality of the cost of service.

In City of Palmdale v. Palmdale Water District (2011) 198 Cal.App.4th 926 and Capistrano Taxpayers Assn. v. City of San Juan Capistrano (2015) 235 Cal.App.4th 1493, the same Fourth District previously invalidated tiered water rate structures that failed to correlate tiered pricing to the actual cost of providing service to customers. These cases rejected public agencies’ tiered structures aiming to implement conservation goals as a justification for rates that exceeded the constitutional proportionality requirement.

Most recently, in Coziahr v. Otay Water Dist. (2024) 103 Cal.App.5th 785, the Fourth District struck down another tiered rate structure because the agency failed to justify its tiered rates. The tiered rates in Coziahr were based on the “peaking factor method” that were derived from a commonly used industry standard manual. The Court found that the data from the manual was not proportional to the customers’ usage and therefore the City could not rely upon it for the establishment of a tiered rate structure that would satisfy the constitutional requirements. More information regarding the Coziahr analysis be found in this alert.

In response to the series of court decisions and current legal vulnerability of Tiered Rate, the California Legislature passed Assembly Bill (“AB”) 1827 (2023–2024). AB 1827 added Government Code Section 53750.6 in 2024 to clarify the permissibility of tiered water rates so long as the rates were tied to cost-of-service. AB 1827 reinforces that conservation-oriented pricing cannot circumvent cost-based justification. Notwithstanding the implementation of AB 1827, the law remains unclear as to what level of evidentiary support is required of a water district when seeking to adopt tiered water rates.

Patz v. City of San Diego Background

The plaintiffs represented a class of single-family residential customers (“Patz”) in the City. Patz filed a class action alleging that the City’s tiered water rates, imposed between 2014 and 2022, violated Proposition 218 by charging them more than the proportional cost of providing water service to their properties.

For single-family residential customers, the City adopted a tiered rate structure. The tiered rate structure required customers to pay higher rates per unit of water based on “peaking factors.” “Peaking factors” are multipliers used to estimate the additional costs a water system incurs to meet higher levels of demand during peak usage periods. The City justified its use of peaking factors due to conservation efforts and the general assumption that higher costs were associated with greater water consumption. Such assumptions were gleaned from an industry-accepted manual (known as the AWWA MI Manual).

The City did not collect time-of-use data or conduct parcel-specific studies to support its allocation of costs to each usage tier. Under the City’s tiered rate structure, non-residential customers, including commercial, industrial, and irrigation users, were charged uniform, flat rates regardless of their consumption levels.

The trial court found that the City’s tiered water rates for single-family residential customers violated Proposition 218 because the City failed to prove that the higher rates charged for increased usage by residential customers reflected the actual, proportional cost of providing water service to those customers.

Fourth District’s Decision

The Court affirmed the trial court’s decision that the City’s tiered rate structure violated Proposition 218. Plaintiffs claimed that the City failed to meet its burden of showing that the higher rates charged for increased consumption reflected the actual, proportional cost of providing water service at those usage levels. The determinative question was whether Section 6(b)(3) provides that a public agency can rely solely on generalized assumptions or conservation goals to establish Tiered Rates. Ultimately, the Court found that the City’s reliance on industry standards from the AWWA MI Manual to develop the tiered rates was insufficient to satisfy Section 6(b)(3) because the data was not specific to the City’s system and customers.

The Court rejected the City’s argument that its methodology justified the tiered water rate structure. Agreeing with the trial court, the Court concluded that the City failed to collect necessary time-of-use data and did not show which customers contributed to peak system demands, undermining its justification for imposing higher rates on some users rather than others.

The City’s argument that its lowest tiered rates reflected cheaper local water sources was unpersuasive because the City commingled all water supplies before delivery and failed to demonstrate which customers received water from which source. The Court reasoned that the City based its tier breakpoints on average usage estimates rather than cost-based thresholds; it noted that the City’s Tier 4 rate was exactly 2.25 times the Tier 1 rate, and that this mathematical precision was evidence that the City designed its rate structure around assumed peaking factors instead of actual cost data. Building on these findings, the Court reaffirmed that Proposition 218 imposes a clear and substantive constraint: agencies must justify each rate tier with concrete cost-of-service evidence, not just modeling assumptions or policy goals.

Notably, the Court held:

“[T]he agency’s burden of proof is straightforward: the agency must show that the fee or charge for the property-related service does not exceed the proportional cost of delivering the service to the parcel. (§ 6(b)(3).) As to how water agencies are to meet this burden in defending tiered water rates, we suggest that water agencies not impose tiered rates (without a vote), where substantial evidence shows the tiered rates are not cost proportional, despite the agency’s purportedly ‘reasonable’ cost projections, allocation methods, and data. In such cases, water agencies risks [sic] violating section 6(b)(3) if they impose tiered rates. Further, tiered rates are not necessarily constitutional. (§ 6(b)(3).) Although Capistrano, in dictum, called tiered rates ‘a good idea’ [Citation.], section 6(b)(3) does not necessarily permit them.”

The Court issued a remittitur, which is due on October 1, 2025. Accordingly, the Court’s opinion, if unmodified, will be binding on or about October 1, 2025, unless the City seeks review with the California Supreme Court.

At this time, it appears that California courts will not accept generalized cost estimates or conservation goals as sufficient proof of proportionality. Public agencies using a Tiered Rate structure should be prepared to defend each tier with detailed, system-specific cost-of-service data or risk a court finding the rate structure unproportional.

The Dissent

Justice Menetrez authored a dissent criticizing both the majority opinion in Patz and the Court’s prior ruling in Coziahr. Justice Menetrez rejected the interpretation that Proposition 218 imposes a rigid and impractical standard that demands a precise level of cost-allocation precision because this threshold is unrealistic, in that Justice’s view, for most agencies to meet. The dissent highlights the majority’s decision to not follow case precedent, which holds that tiered rates are constitutional when they reflect a reasonable relationship to cost.

The exacting standard that the majority seeks to implement, according to Justice Menetrez, undermines the practicalities of water system management, and therefore, public agencies should not be penalized for relying on reasonably industry-wide accepted methodologies.

Justice Menetrez further warned that the majority’s approach risks invalidating well-justified rate models and could discourage agencies from implementing rate structures that promote conservation and equity.

Implications and Considerations for Agencies Using Tiered Rate Structures

Public agencies, if they impose or maintain tiered service rate structures, should be prepared to show, with detailed and customer-specific data, that higher usage incurs higher costs of service. Public agencies cannot rely solely on industry-accepted methodologies, generalized peaking factors, or conservation rationales. Courts will independently scrutinize whether rate structures comply with Proposition 218’s cost-of-service requirement and whether tiered service rate structures are supported with evidence of proportionate costs of service. We recommend that agencies carefully assess the legal sufficiency of any Tiered Rate studies to ensure rate structures are legally defensible under these principles. If you have questions about how Patz may affect your agency’s water rate structures, please contact your AALRR counsel.

Special thanks to our FCPPG law clerk, Elyse Capelli, for her assistance with this alert.