The Price of Water Just Got More Complicated: San Diego’s Legal Battle Over Tiered Rates

On July 30, 2025, a divided California Court of Appeal issued its long-awaited opinion in Patz v. City of San Diego, affirming the trial court’s judgment that the City’s tiered residential water rates violated Proposition 218 of the California Constitution. The ruling reinforces the strict interpretation of cost-of-service requirements previously articulated in Coziahr v. Otay Water District. However, given the nearly 70-page dissenting opinion, the California Supreme Court may take up the case if the City seeks review.

I.    The Majority Opinion: Data Shortfalls and Proposition 218 Compliance

Patz was a class action challenge to the City of San Diego’s tiered water rate structure, under which residential customers were charged increasing rates (i.e., a tiered-rate structure) based on higher levels of water usage. The City argued that higher-volume users should pay more due to the increased infrastructure costs required to support peak demands, which is unnecessary for lower-use customers.

The Court of Appeal rejected this rationale, holding that the City failed to demonstrate that its rates bore a reasonable relationship to the “proportional cost of service attributable to the parcel,” as required by Proposition 218. Specifically, the Court found that:

• The City’s rates were designed primarily to encourage water conservation, rather than to reflect actual costs of service—an objective explicitly prohibited by Proposition 218.
• The City’s “peaking factors” (i.e., multipliers) were based on historical consumption data to allocate costs across tiers, without employing time-of-use metering or customer specific data to justify those allocations.
• Applying a tiered structure solely to residential customers, while charging uniform rates to other classes (i.e., commercial customers), may result in discriminatory treatment where customers pay different rates for the same volume of water.

In addition to determining that historical data was not a sufficient substitute for real-time usage, the Court also took issue with the lack of data regarding the source of the water supply. While the City purchases a majority of water from the San Diego County Water Authority, it also owns a small local reservoir. Water supplies from both sources are comingled before distribution to users. The City allocated all reservoir-related costs to the lowest consumption tier, and the purchased San Diego County Water Authority costs to the higher tiers, based on the premise that the reservoir alone could serve the lowest tier. The Court rejected this allocation, citing two deficiencies:

• The City failed to present adequate evidence showing that the reservoir could independently meet the demands of the lowest tier.
• The City could not prove that only the reservoir water (as opposed to a co-mingled supply) was distributed to that tier.

As a result, the majority—Justices Fields and McKinster—concluded that the City’s rate structure violated Proposition 218 and upheld a damages award of approximately $79.5 million. However, the Court remanded the matter to the trial court to determine whether newly enacted Government Code section 53758.5 precludes a direct refund and instead mandates prospective rate reductions. 

II.    The Dissent: A Call for Practicality and Legal Reassessment

In a dissenting opinion spanning nearly 70 pages, Justice Menetrez rejected the majority opinion, as well as the Court’s prior decision in Coziahr. The dissent explained that these holdings imposed an unduly rigid interpretation of Proposition 218 that requires unfeasible levels of precision at the expense of the practical administration of water costs.  

Instead, the dissent endorsed a more flexible approach, concluding that the City’s methodology reasonably approximated the costs of service across different usage levels. Justice Menetrez expressed concern that the majority’s approach would undermine legitimate conservation efforts and discourage water agencies from pursuing equitable and sustainable rate structures amid complex fiscal and operational constraints. 

In support of future review, the dissent noted that the majority opinion— in addition to the decision in Cozhiar— creates a split in law by conflicting with Court of Appeal precedent upholding “reasonable” rates and requiring that lower water users not incur costs associated with only the higher levels of water usage.  

III.    The Road Ahead: Heightened Scrutiny and the Need for Legal Strategy

Patz, along with Coziahr, signals a continued judicial trend toward heightened scrutiny of tiered water rate structures under Proposition 218. Water agencies must now be prepared to present detailed, contemporaneous data tied directly to levels of service.

Legal counsel should be involved early in the rate-setting process to ensure compliance with evolving standards and to develop a record capable of withstanding judicial review. BBK will continue monitoring Patz and the judicial landscape closely, including whether the California Supreme Court grants review and clarifies the permissible scope of tiered rates under Proposition 218. For questions on how this decision may impact your agency, please contact Lutfi Kharuf or Dean Atyia.

Disclaimer: BBK Legal Alerts are not intended as legal advice. Additional facts, facts specific to your situation, or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.