On May 23, 2023, the First District Court of Appeal issued a decision in Campana v. East Bay Municipal Utility District, A163054, finding a Proposition 218 challenge to tiered water rates was barred by the 120-day limitations period for reverse validation of municipal utility district water rates. While the governing statute governs a fairly narrow group of public agencies, the case’s holding has potential benefits for a much wider group of agencies that take advantage of SB 323 when setting water rates.

The plaintiffs, a group of water customers, brought a putative class action against the East Bay Municipal Utility District (EBMUD), alleging the agency's tiered water rates violated Proposition 218's requirement that "property-related fees" for services shall not exceed the proportional cost of the service attributable to the parcel (Cal. Const. article XIII D, section 6). On July 17, 2019, Plaintiffs presented a claim to EBMUD pursuant to the Government Claims Act (Gov. Code § 810 et. seq.) seeking a refund of water service charges. On January 13, 2020, after the statutory time period to contest the fees had lapsed, plaintiffs filed a complaint. EBMUD filed a demurrer to the complaint arguing that the complaint was time barred by the 120-day statute of limitations found in Public Utilities Code section 14402, because plaintiffs were challenging water rates that were adopted in 2017 and 2019. The trial court agreed, and plaintiffs appealed.

The Court of Appeal analyzed "the nature of the cause of action, i.e., the 'gravamen'" of the complaint, to identify the applicable statute of limitations. Plaintiffs sought to characterize their claim as "merely seeking a refund of the excess fees that were paid," rather than attack on the constitutionality of the entire rate scheme. EBMUD argued that the complaint challenged its adoption of water rates, and that because a refund claim necessarily depends on a finding that the rate scheme was invalid, the 120-day limitation period under section 14402 applied. The court agreed with the agency, and found that the "refund claim" was necessarily based on the alleged illegality of the previously adopted tiered-rate scheme.

The court further rejected an argument that the limitations period could run anew when, each month, the agency collected the allegedly illegal fees, pursuant to Howard Jarvis Taxpayers Assn. v. City of La Habra (2001) 25 Cal. 4th 809. The court rejected this rolling statute of limitations argument and found that because the agency's water rate adoption resolution is subject to validation statutes, the 120 day statute of limitation applies. Finally, the court found that any notice requirements imposed by the Government Claims Act did not extend the applicable statute of limitations; rather, the 120-day statute of limitations applied because the gravamen of the action was a challenge to the validity of the rates. Plaintiffs could not rely on the timelines set out in the Government Claims Act because the shorter statute of limitations had already run at the time of the plaintiff's complaint.

This decision is significant for public agencies. Previously, courts have found Proposition 218 challenges to be timely, even years after enactment of challenged rates, based on the date that water bills were paid, under an ongoing-accrual standard established in Howard Jarvis Taxpayers Assn. v. City of La Habra. Here, the court expressly declined to apply that rule because section 14402 made EBMUD’s adoption of water rates subject to the validation statutes.

But this rule does not just benefit municipal utility districts like EBMUD that are subject to validation under the Public Utilities Code. SB 323 (Caballero), which added Section 53759 to the Government Code, now similarly requires challenges to water and wastewater rates to be brought as reverse validation actions, commenced within 120 days of their effective date, if the adopting agency has given notice of that requirement as part of its Proposition 218 process. Under Campana, that requirement would now seem to eliminate ongoing accrual under La Habra for any rates adopted pursuant to SB 323.

This case accordingly gives all public agencies adopting water and wastewater rates and charges even more reason to incorporate SB 323 notice into their rate-setting processes. And all are advised to consult their legal counsel to explore the methods for doing so.