AB 2180 Clarifies How California Agencies May Demonstrate Prop 218 Compliance for Water, Sewer, and Solid Waste Rates

11.05.2026

On September 27, 2026, Governor Newsom signed Assembly Bill 2180 (“AB 2180”) into law. AB 2180 adds Government Code section 53751.5, effective on January 1, 2027, as part of the Proposition 218 (“Prop 218”) Omnibus Implementation Act. In response to uncertainty and litigation over how local agencies demonstrate compliance with Prop 218’s proportionality and cost-of-service requirements for property-related fees, AB 2180 establishes statutory standards and methodologies that clarify how an agency may make that showing, including standardized methods for the equitable allocation of service-related costs.

In plain terms, AB 2180 makes it easier for local agencies — such as cities, counties, and water districts — to show that the rates they charge for water, sewer, and trash service are legally compliant. AB 2180 spells out the kinds of data and the cost-allocation methods an agency may use to justify those rates. But AB 2180 does not change the core rule of Prop 218: a property owner cannot be charged more than the cost of serving that owner’s property.

Prop 218 Background

Prop 218 (1996) was part of a series of voter initiatives limiting the ability of state and local governments to impose taxes and fees. The first was Proposition 13 (1978) (“Prop 13”), which amended the California Constitution to cap ad valorem property taxes (taxes based on a property’s assessed value) at one percent of assessed value, restrict annual increases in assessed valuation to two percent unless ownership changes, and require two-thirds voter approval for local special taxes. However, Prop 13 did not impose comparable restrictions on revenue labeled as fees, charges, and assessments, which gave local governments a way to raise money that looked like a fee rather than a tax and sidestep Prop 13’s limits.

Prop 218 was designed to close this loophole by imposing constitutional restrictions on local assessments and property-related fees (charges tied to owning property, such as a monthly water or sewer bill) that had previously fallen outside Prop 13’s reach. One of Prop 218’s principal reforms was to require voter approval for many local revenue measures that previously could be imposed without a direct vote of the electorate. However, Prop 218 exempts fees for sewer, water, and solid waste services from its voter-approval requirement.

Instead, Article XIII D, section 6 of the California Constitution subjects those fees to procedural requirements and two basic substantive limits: the total revenue from a fee cannot exceed what it costs to provide the service, and no single parcel can be charged more than its fair share of that cost. The second limit is known as the “proportionality” requirement — the amount a property owner pays must align with the cost of serving that owner’s property. If a fee is challenged in court, the agency, not the person challenging the fee, must prove that the fee follows these rules. Disputes have centered on the proportionality requirement, particularly in litigation involving cost-of-service studies (the analyses agencies use to set rates) and rate design, because utility rates are not approved at the ballot box.

The Appellate Split That Prompted AB 2180

In the two years before AB 2180, three Court of Appeal decisions exposed a sharp disagreement over how an agency must prove that its tiered rates — rates that charge more per unit as a customer uses more — actually track the cost of service.

In Coziahr v. Otay Water District and Patz v. City of San Diego, the Fourth District adopted a stringent approach, requiring agencies to prove that rates matched the cost of service attributable to particular parcels, not just that the rates rested on a reasonable method of dividing up costs. The Second District took the opposite view in Dreher v. Los Angeles Department of Water & Power, holding that Prop 218 requires proportionality, not exactness, and allows agencies to use reasonable cost-allocation methods. The California Supreme Court granted review of Dreher on March 11, 2026.

After AB 2180 was signed, the Court — on September 30, 2026 — requested supplemental briefing on the new statute’s effect on the issues under review. AB 2180 was therefore enacted against a backdrop of continuing judicial uncertainty, and that review remains pending.

AB 2180’s Clarification of Prop 218 Compliance

The new Government Code section 53751.5 changes how an agency proves its rates are fair — it does not change the underlying rule that a fee cannot exceed the cost of service. Its general standard, which applies to any fee or charge under Article XIII D, section 6 of the California Constitution, is that an agency may show a parcel’s proportional cost using any method that reasonably divides the measurable cost of providing service among all parcels. The agency does not need flawless, parcel-by-parcel figures; it may rely on historic, current, estimated, or projected data, so long as that data reasonably captures the cost of the service to be provided. The statute expressly does not apply, however, to fees for water or sewer connections or to capacity charges subject to Government Code section 66013, which most agencies already recognize are not subject to Prop 218.

The statute then spells out, in two respects, what an agency may rely on when it prepares a rate study.

Grouping parcels and customers (Government Code 53751.5(b).) For water and sewer service, an agency does not have to measure the exact cost of serving each individual parcel. An agency may instead charge a single uniform rate, or use tiered rates, and may sort parcels or customers into classes based on characteristics that tend to predict how much service they will use. The statute gives a non-exclusive list of those characteristics: the nature and size of the improvements on a parcel (for example, its buildings), how the land is used, the number or type of plumbing fixtures, meter size, and peak-use characteristics (a customer’s highest-demand usage).

Dividing costs among tiers (Government Code 53751.5 (c).) For tiered water rates, an agency may assign costs to each tier using any reasonable basis. The statute lists several acceptable bases, including: the cost of obtaining water from different sources; the cost of operating, maintaining, and building facilities; a tier’s share of systemwide peak demand; and costs arising from higher usage or from conservation, demand-management, or additional (“incremental”) water service. The statute also settles two points about tier design. First, an agency does not need a cost-based — or any other — justification for where it sets a tier breakpoint, the usage level at which a customer moves from one tier into the next. Second, although the agency has discretion in how it divides costs among tiers, the rate charged in any tier still cannot exceed the proportional cost of service reasonably allocated to the parcels in that tier.

None of this displaces Prop 218 itself. The agency still has to justify its fees, and a rate that exceeds the proportional cost of service is still not allowed. What section 53751.5 does is give agencies a clearer, more reliable way to prove that their rates meet that test.

Preparing for Implementation

Agencies should evaluate current rate studies and planned Prop 218 processes under the new statutory framework and ensure that the cost-of-service analyses align with the standards codified in the new Government Code section 53751.5. Agencies should also clearly document how they allocate costs among customer classes and rate tiers, including the data sources, assumptions, and methodologies that support those decisions. Thorough documentation will strengthen the administrative record and help agencies defend their rates if a challenge arises.

If you have questions about this Alert or would like guidance regarding implementation of the AB 2180 statutory framework, please contact the authors of this Alert or your usual AALRR counsel.

Special thanks to our FCPPG law clerk, Elyse Capelli, for her extensive efforts on this Alert.