Good News for Tiered Rates: Court Upholds LADWP’s Budget-Based Tiered Water Rates
On December 8, 2025, the California Court of Appeal issued its decision in Dreher v. City of Los Angeles Department of Water and Power, affirming Los Angeles Department of Water and Power's (LADWP) budget-based tiered water rates for single-dwelling unit customers. The Court rejected Patz v. City of San Diego’s strict interpretation of Proposition 218 in several key respects, finding: (1) agencies may base tiered rates on source-of-supply costs even when supplies are commingled; (2) tier breakpoints do not require cost-based justification; and (3) agencies may rely on peak pumping and storage costs to support higher rates in upper tiers. The Court also held that while a low-income subsidy adjustment violates Proposition 218, refunds are not presumed. Instead, a claimant must satisfy statutory prerequisites, including paying under protest and submission of an administrative claim.
A. LADWP Adopts Tiered Water Rates Based on Peaking Factors and Source-of-Supply
LADWP adopted budget-based, tiered water rates in 2016 that included four tiers for single-dwelling unit customers, with rates increasing proportionally to the customer’s usage. In every billing cycle, all customers benefited from the lowest tier rate, but if a customer’s usage increased, higher tier rates applied. Each tier included several common components, such as infrastructure costs to meet base demands. The higher tiers included progressively more expensive water supply costs and additional marginal costs for infrastructure, operations and maintenance driven by higher-volume water use.
LADWP determined tier widths based on each customer’s usage characteristics. Tier 1 covers basic indoor water needs and includes eight units of water. Tiers 2 and 3 meet parcel‑specific outdoor irrigation needs, and tier widths vary based on parcel size, season and temperature zone. Tier 4 captures all usage beyond Tier 3. Additionally, LADWP applied a cost to fund low-income subsidies to all tiers, except for customers who received the subsidy.
B. The Court Affirms Trial Court’s Determination that All Aspects of Rate Structure Comply with Proposition 218, Except for Subsidy
In 2019, the Drehers sued for declaratory relief and a class-wide refund after LADWP denied their Government Claim. The Drehers argued that both the tiered rate structure and subsidy violated Proposition 218. The trial court upheld the tiered rate structure, finding that LADWP’s allocation of source of supply and peaking costs complied with Proposition 218’s proportionality requirements. The court also found that creating water-use budgets for each customer to set parcel-specific tier widths was consistent with those requirements.
The trial court did find that the subsidy violated Proposition 218 because it required some ratepayers to bear a cost for the benefit of others. However, the court rejected the Drehers’ claim for a refund because the Drehers failed to satisfy the “payment under protest” requirements prescribed by the Health and Safety Code.
The Court of Appeal affirmed the judgment in full, citing Capistrano Taxpayers Association v. City of San Juan Capistrano. The court agreed with Capistrano’s reasoning that an agency may (and likely should) “pass on the incrementally higher costs of expensive water to incrementally higher users” through tiered rates, so long as the agency can establish the cost to deliver water in each tier. This approach protects lower‑use customers from subsidizing higher-use customers through supply or infrastructure costs that their levels of usage do not require.
In affirming LADWP’s rates, the Court emphasized several points:
- Source-of-Supply Allocation: Proposition 218 “does not require the City to trace the flow of water from each source-of-supply to each parcel, molecule by molecule.” Agencies may allocate more expensive supply sources to higher tiers even when water supplies are commingled.
- Tier Breakpoints and Water Budgets: Agencies need not rely on a cost-based justification when determining the break points between tiers, but may instead set tiers to achieve efficiency standards, so long as the rate within each tier reflects the proportional cost of service for that level of usage.
- Peaking Costs: Peak infrastructure costs (i.e., pumping and storage costs) may be allocated to the upper tiers when that level of usage drives the need for additional infrastructure capacity. Importantly, Dreher did not require time-of-use metering and instead allowed LADWP to allocate peaking costs based on overall pumping and storage capacity.
- Refunds Are Not Presumed: A refund may be awarded subsequent to administrative exhaustion and compliance, including payment under protest when applicable, but is not presumed.
In reaching these conclusions, the Court of Appeal expressly rejected the findings and reasoning announced by the majority in Patz v. City of San Diego and Coziahr v. Otay Water District on July 30, 2025, which we covered here. This is especially notable given the California Supreme Court’s very recent determination to decline review of Patz.
C. A Path Toward Consistency
Dreher offers helpful guidance and signals a practical approach to the administration of water rates. It also vocally diverges from precedent issued earlier this year, potentially paving the way for Supreme Court review. Perhaps in so doing, the Dreher Court acknowledged the need for a uniform legal framework that can be practically administered in the face of the complex water needs of California citizens. We will keep you updated on future developments as courts continue to refine their approach to the review of property-related fees under Proposition 218. In the meantime, please contact Lutfi Kharuf and Dean Atyia to discuss how Dreher impacts your agency.
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.
