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Northern California Water Association v. State Water Resources Control Board.

California Court of Appeals, Third District, Sacramento

March 2, 2018

NORTHERN CALIFORNIA WATER ASSOCIATION et al., Plaintiffs and Respondents,
v.
STATE WATER RESOURCES CONTROL BOARD et al., Defendants and Appellants. CALIFORNIA FARM BUREAU FEDERATION et al., Plaintiffs and Respondents,
v.
STATE WATER RESOURCES CONTROL BOARD et al., Defendants and Appellants.

         APPEAL from a judgment of the Superior Court of Sacramento County Nos. 03CS01776, 04CS00473, Raymond M. Cadei, Judge. Reversed.

          Kamala D. Harris and Xavier Becerra, Attorneys General, Kathleen A. Kenealy Acting Attorney General, Robert W. Byrne, Senior Assistant Attorney General, Eric M. Katz, Helen G. Arens, and Carol A. Z. Boyd, Deputy Attorneys General, for Defendants and Appellants.

          Somach Simmons & Dunn, Stuart L. Somach, Daniel Kelly, Robert B. Hoffman, Brittany K. Lewis-Roberts, and Lauren D. Bernadett for Plaintiffs and Respondents.

          Blease, Acting P. J.

         This appeal involves challenges to the State Water Resources Control Board's (Board) imposition of a new annual fee on water right permit and license holders in fiscal year 2003-2004 to cover a portion of the costs of the Board's Division of Water Rights (Division or Water Rights Division).

         In 2003, the Legislature enacted Water Code[1] section 1525, which requires the holders of permits and licenses to appropriate water to pay an annual fee according to a fee schedule established by the Board. (§ 1525, subd. (a).) At the same time, the Legislature enacted sections 1540 and 1560, which allow the Board to allocate the annual fee imposed on a permit or license holder who refuses to pay the fee on sovereign immunity grounds to persons or entities who contracted for the delivery of water from that permit or license holder.

         To implement section 1525's fee requirement, the Board adopted California Code of Regulations, title 23, sections 1066 and 1073 (regulation 1066 & regulation 1073). Regulation 1066 sets forth a fee formula for permit and license holders. Regulation 1073 sets forth a formula for allocating the annual fee “for projects within the Central Valley Project” (CVP) when the Board determines that the United States Bureau of Reclamation (USBR), which operates the CVP, will not pay the fee. (Regulation 1073, subd. (b).)

         Plaintiffs Northern California Water Association, California Farm Bureau Federation, and individual fee payors claimed that the annual fee imposed in fiscal year 2003-2004 constituted an unlawful tax, as opposed to a valid regulatory fee, under article XIII A, section 3, of the California Constitution (Proposition 13)[2] because it required fee payors to pay more than a de minimis amount for regulatory activities that benefited non-fee-paying right holders. Plaintiffs also claimed that the fees allocated to the water supply contractors violated the supremacy clause of the United States Constitution because they exceeded the contractors' beneficial interests in the USBR's water rights.

         Our Supreme Court has already ruled that sections 1525, 1540, and 1560 are constitutional on their face. (California Farm Bureau Federation v. State Water Resources Control Bd. (2011) 51 Cal.4th 421, 428 (Farm Bureau II).) The court, however, found that the record was unclear as to (1) “whether the fees were reasonably apportioned in terms of the regulatory activity's costs and the fees assessed, ” and (2) “the extent and value of the [contractors' beneficial] interests.” (Id. at p. 428.) Accordingly, the court directed this court to remand the matter to the trial court to make findings on those issues. (Ibid.)

         Following a 10-day bench trial, the trial court issued a statement of decision that determined inter alia that the statutory scheme as applied through its implementing regulations imposed a tax, as opposed to a valid regulatory fee, by allocating the entire cost of the Division's regulatory activities to permit and license holders, while non-paying-water-right holders who benefit from and place burdens on the Division's activities pay nothing.[3] The trial court likewise found that the fees passed through to the water supply contractors in fiscal year 2003-2004 pursuant to regulation 1073 ran afoul of the supremacy clause “because the allocation of fees [was] not limited to the contractors' beneficial or possessory use of the [USBR's] water rights.” In addition, the trial court found that the fee regulations were invalid because they operated in an arbitrary manner as to a single payor, Imperial Irrigation District. Accordingly, the trial court invalidated regulations 1066 and 1073, “as adopted by Resolution 2003-0077 in 2003-2004.”[4]

         The Board appeals, contending the trial court erred in invalidating the fee regulations.

         We shall conclude that the trial court's central premise -- that the Board allocated the entire cost of the Division's regulatory activities to permit and license holders -- is wholly incorrect because it fails to recognize the role that general fund money played in fiscal year 2003-2004. That year the Legislature appropriated roughly $9 million dollars for the Water Rights Division, roughly 51 percent of which was paid from the Water Rights Fund (fee revenue), while 43 percent was paid from the state's general fund, and 6 percent from reimbursements and other funds. Moreover, the record shows that roughly 90 percent of the Division's costs were attributable to permit and license holders, while 10 percent were attributable to non-fee-paying right holders. Thus, the fees assessed on permit and license holders were proportionate to the benefits derived by them or the burdens they placed on the Division. Plaintiffs' assertion that the water right fee was imposed for the second half of the fiscal year is at odds with the evidence and the language of section 1525, subdivision (e), which provides that the fees “imposed pursuant to this section for the 2003-04 fiscal year shall be assessed for the entire 2003-04 fiscal year, ” and section 1552, which states that “moneys in the Water Rights Fund are available for expenditure, upon appropriation by the Legislature.” (Italics added.)

         We shall further conclude that the Board's decision to allocate all of the USBR's annual fee for projects within the CVP to the water supply contractors was reasonable. The record and the case law establish that the USBR provides the contractors with all available water after satisfying its obligations under state and federal law. Because the CVP contractors received everything the USBR had to give under its CVP permits and licenses, the Board reasonably valued the CVP contractors' beneficial interest in those permits and licenses at 100 percent. Finally, we shall conclude that the trial court erred in determining that the fee regulations were invalid based on their application to a single payor. Accordingly, we shall reverse the judgment invalidating the fee regulations.

         FACTUAL AND PROCEDURAL BACKGROUND[5]

         “The water in California belongs to the people, but the right to use water may be acquired as provided by law.” (Farm Bureau II, supra, 51 Cal.4th at p. 428, citing §§ 102, 1201, italics omitted.) The Board is responsible for the “orderly and efficient administration of the water resources of the state” and exercises “the adjudicatory and regulatory functions of the state in the field of water resources.” (§ 174, subd. (a).) The Water Rights Division administers the water rights program, but its authority is limited. (Farm Bureau II, supra, 51 Cal.4th at pp. 429-430.) The Board regulates all appropriative water rights[6] acquired since 1914 through a system of permits and licenses. (Id. at p. 429.) It does not have jurisdiction to regulate riparian, [7] pueblo, [8] and pre-1914 appropriative rights (RPP right). (Id. at p. 429.) It does, however, “have authority to prevent illegal diversions and to prevent waste or unreasonable use of water, regardless of the basis under which the right is held.” (Ibid.;see also § 275.) At all relevant times herein, RPP right holders accounted for approximately 38 percent of all surface water rights, the USBR accounted for 22 percent, and permit and license holders (other than the USBR) accounted for 40 percent.

         Prior to fiscal year 2003-2004, the operation of the Water Rights Division was supported primarily by the state's general fund, with less than one percent of Division costs covered by fees. The Governor's budget proposal for fiscal year 2003-2004 proposed expenditures of $8.7 million to support the water rights program, $7.2 million of which was to be payable from the general fund. In its analysis of the fiscal year 2003-2004 budget bill, the Legislative Analyst's Office (LAO) recommended that general fund support for the water rights program be fully replaced with “a new annual compliance fee assessed on all water rights holders under the board's jurisdiction.” The Board opposed the LAO's recommendation, arguing that the LAO's analysis incorrectly assumed that “all water right actions benefit... the regulated community (water right permit and license holders)” and failed to take into account water-right holders outside of the Board's jurisdiction who also benefit from the Division's activities but would not be assessed a fee (i.e., RPP right holders).

         The final budget act, which took effect on August 2, 2003, appropriated roughly $9 million for the Water Rights Division, $4.4 million of which was payable from the Water Rights Fund, which had yet to be established. The final change book to the Governor's fiscal year 2003-2004 budget stated in pertinent part: “Adopt trailer bill language to establish an annual water right fee. Fee revenues would be deposited in the newly created Water Rights Fund and used to offset General Fund expenditure reductions.” (Italics added.)

         In September 2003, the Legislature passed Senate Bill No. 1049 (2003-2004 Reg. Sess.) (Senate Bill 1049) by a simple majority (53 percent). (Stats. 2003, ch. 741, p. 5549 et seq.) Senate Bill 1049 was signed by the Governor on October 8, 2003, and took effect on January 1, 2004. Senate Bill 1049 repealed certain sections of the Water Code and enacted sections 1525 through 1560, which among other things, imposed an annual fee on water right permit and license holders (§ 1525) and established the Water Rights Fund (§§ 1550 & 1551).

         As relevant here, section 1525, subdivision (a) requires water right permit and license holders to pay an annual fee according to a fee schedule established by the Board.[9] Subdivision (c) of section 1525 requires the Board to set the fee schedule “so that the total amount of fees collected pursuant to this section equals that amount necessary to recover costs incurred in connection with” the Division's activities.[10] Subdivision (d)(1) of section 1525 directs the Board to adopt the fee schedule as emergency regulations in accordance with section 1530, while former subdivision (d)(3) required the Board to “set the amount of total revenue collected each year through the fees authorized by this section at an amount equal to the revenue levels set forth in the annual Budget Act for this activity.”[11] Finally, subdivision (e) of section 1525 specifies that “[a]nnual fees imposed pursuant to this section for the 2003-04 fiscal year shall be assessed for the entire 2003-04 year.”

         Section 1540 allows the Board to allocate the annual fee (or a portion thereof) of a person or entity who refuses to pay it based on sovereign immunity to persons or entities who have contracts for the delivery of water from the person or entity upon whom the fee was initially imposed. Section 1560 sets out the options that may be pursued when the United States or an Indian tribe declines to pay the annual fee by relying on sovereign immunity.

         Sections 1550 and 1551 establish the Water Rights Fund into which all fees, expenses, and penalties collected by the Board must be deposited. Section 1552 sets forth the purposes for which the money in the Water Rights Fund may be used and provides that such funds are available for expenditure “upon appropriation by the Legislature.”

         To establish a fee schedule as directed in section 1525, the Board began with the $4.4 million figure set forth in the fiscal year 2003-2004 budget -- the amount of the Division's $9 million budget that was to be paid from the Water Rights Fund. The Board determined that most of the fee revenue should come from annual fees because it believed that annual fees would provide a more stable funding source, and most of the Division's work is related to overseeing and protecting water rights.

         The Board assumed that 40 percent of permit and license holders would not pay the annual fee because 40 percent of permit and license holders failed to comply with the existing mandatory reporting requirements. To account for the estimated 40 percent noncollection rate, the Board divided $4.4 million by 0.60, which generated a revised billing target of over $7 million.

         The Board elected to apportion the fees among permit and license holders based on the face value of their permits and licenses, i.e., the total annual amount of diversion authorized by the permit or license, [12] reasoning that the more water held under a permit or license, the greater the regulatory burden to the Division because larger projects generally have greater environmental impacts, involve more controversial issues, and affect a greater number of people. The Board elected not to base the fees on the water actually used because it did not have complete or reliable records concerning actual water used. As previously noted, only 60 percent of permit and license holders complied with annual reporting requirements, and the Board had no way of accurately monitoring use. The Board also rejected a fee-for-service approach as too costly, beyond the capability of its accounting system, and unpredictable.

         The Board reduced the face value of the permits and licenses for hydroelectric projects because the Division expends fewer resources administrating those water rights.[13] As a result of these reductions, the face value of all water right permits and licenses was reduced from 322 million to 200 million acre-feet.

         After running several calculations, the Board set annual fees at the greater of $100 or $0.03 per acre-foot based on the face value of the permit or license.[14]

         The Board used the same methodology for calculating the USBR's annual water right fee as it did for other permit and license holders. The face value of all the USBR permits and licenses was 116 million acre-feet. After adjustments for hydropower, the face value of the USBR's permits and licenses was reduced to 86 million acre-feet, which in fiscal year 2003-2004 amounted to an annual fee of roughly $2.58 million (86 million acre-feet multiplied by $0.03).

         Once the Board determined that the USBR would not pay the fee based on sovereign immunity, the Board elected to allocate the portion of the USBR's fee attributable to its CVP permits and licenses, 81.7 million acre-feet, to the CVP contractors. (§§ 1540, 1560, subd. (b)(2).) The 81.7 million-acre feet amounted to $2.45 million in annual fees (81.7 million acre-feet multiplied by $0.03). The Board divided the $2.45 million among the projects within the CVP according to each project's water rights, and using records provided by the USBR, the Board grouped the CVP contractors by the project serving them. It then assessed the CVP contractors a prorated share of the amount of fees associated with the projects serving them, based on the amount of water specified in their contracts.

         To implement the fee schedule as directed in section 1525, the Board adopted regulation 1066 and regulation 1073. Regulation 1066 applies to water right permit and license holders. Regulation 1066, former subdivision (a), provided: “A person who holds a water right permit or license shall pay an annual fee that is the greater of $100 or $0.03 per acre-foot based on the total annual amount of diversion authorized by the permit or license.” (Reg. 1066, subd. (a), Register 2003, No. 52 (Dec. 23, 2003).)

         The Board adopted regulation 1073 to implement sections 1540 and subdivision (b)(2) of section 1560, which among other things, authorized the Board to allocate an annual fee imposed on the United States to persons or entities who contract with the United States for the delivery of water when the United States declines to pay the annual fee based on sovereign immunity. As relevant here, regulation 1073 provides that if the USBR declines or is likely to decline to pay fees or expenses for projects within the CVP, the Division Chief shall allocate those fees or expenses to the USBR's water supply contractors. (Regulation 1073, subd. (b)(2).) The regulation further provides that “[t]he fee or expense for projects of the [CVP] shall be prorated among the contractors for the [CVP] based on either the contractor's entitlement under the contract or, if the contractor has a base supply under the contract, the contractor's supplemental supply entitlement.”[15] (Regulation 1073, subd. (b)(2).)

         In January 2004, the Board of Equalization[16] sent fee notices to water right permit and license holders and to those who contracted with the USBR for the delivery of CVP water. (§§ 1536 & 1537, subd. (a).) The Division collected nearly $7.4 million in fees but expended just over $4.6 million of that amount. The remainder was deposited into a new fund and became the starting balance of the Water Rights Fund for the next fiscal year.

         The Division's actual adjusted operational costs and funding sources for fiscal year 2003-2004 were as follows:

WATER RIGHTS

State Operations

General Fund

$3.865*

Public Resources Account, Cigarette and Tobacco Products Sales Tax

$0.355

Federal Trust Fund

$0.150

Reimbursements

$0.088

Water Rights Fund

$4.608

Totals, State Operations

$9.066

         * Dollars in millions

         Roughly 51 percent of the Division's costs were paid from the Water Rights Fund, while 43 percent were paid from the state's general fund, and 6 percent from reimbursements and other funds.

         Plaintiffs challenged the imposition of the annual water right fee, seeking declaratory and injunctive relief and a writ of mandate. They alleged that the statutory scheme enacted by the Legislature was unconstitutional on its face and “as applied” through the emergency regulations adopted by the Board. The trial court initially denied the writ of mandate, ruling that the money collected constituted valid regulatory fees, rather than taxes. It also rejected plaintiffs' other constitutional claims.

         We reversed in part, holding that the statutory scheme was constitutional on its face, but that it was unconstitutional as applied through the fee formulas set forth in the emergency regulations. (California Farm Bureau Federation v. California State Water Resources Control Bd. (2007) 146 Cal.App.4th 1126, 1132 (Farm Bureau I).) We therefore remanded the matter to the trial court with instructions to order the Board to adopt valid fee formulas. (Id. at pp. 1160-1161.)

         Our Supreme Court affirmed our judgment holding that the statutory scheme was constitutional on its face, but reversed our determination that the statutes were unconstitutional as applied through the regulations. (Farm Bureau II, supra, 51 Cal.4th at p. 428.) The court found that the record was inadequate and that the trial court's order lacked sufficient factual findings and remanded the matter to this court with ...


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