A ruling by a county judge could mean that the Santa Clara
Valley Water District will owe millions of dollars in refunds for
groundwater charges to the City of Gilroy and thousands of local
well owners, and that the public agency may have to significantly
raise rates paid by agricultural water users in South County.
A ruling by a county judge could mean that the Santa Clara Valley Water District will owe millions of dollars in refunds for groundwater charges to the City of Gilroy and thousands of local well owners, 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 an ongoing lawsuit, Santa Clara County Superior Court Judge Kevin J. Murphy said Thursday that 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 2005-06. In addition, during the lawsuit of Great Oaks Water Co. vs. the SCVWD, the judge’s ruling says the district violated the Santa Clara Valley Water District Act –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. A water district lawyer also said they have used the same formula to charge its other customers as it used for Great Oaks.
“We think this decision will have a large effect on all 4,000 well owners in Santa Clara County,” said Great Oaks General Counsel Tim Guster. “We have also challenged the charge each year since (2005-06). 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 that serves about 100,000 customers in south San Jose, will seek a refund for the groundwater charges it paid in 2005-06 – about $5 million – and fees it has paid each year since then, Guster said.
In the current fiscal year, the water district expected to receive about $72 million 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 ruling.
The district will continue 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 – or about the amount of 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, near Monterey Road and Dunne Avenue.
Thursday’s ruling could also have a big impact on local agricultural users, who currently pay $16.50 per acre foot of water. According to Murphy, one way in which the district violated the state act that created the agency was by unfairly charging 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 district 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.”
The City of Gilroy is one of 13 county retailers that actually bills the 1.8 million customers from Los Altos to Gilroy. The city has more than 12,000 water customers who pay about $32 a month for water and at least an additional $30 for separate sewer services. Officials here are already considering how to cut residents and businesses’ consumption by 15 percent after a district mandate earlier this year. The city council will consider any rate increase this month or next and have continually expressed concern with the legality of groundwater charges in recent years.
In light of the recent court decision, San Francisco-based real estate mogul Luke Brugnara has re-energized his offer to sell the city water running through his rural property off Redwood Retreat Road in northwest Gilroy. Brugnara offered to sell water to the city last year, but City Administrator Tom Haglund eventually rejected the proposal due to environmental concerns and legal uncertainties related to the potential purchase from Brugnara’s seasonal reservoir that state agencies have only incomplete records on.
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.
Prop 218 addresses the use of “property related fees” imposed by public agencies in California.
“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.”
