Governor Signs AB 2180, Clarifying Proposition 218 Cost-of-Service Requirements
New Law Confirms Agencies May Use Reasonable Cost-Allocation Methods, Customer Classes, and Tiered Rates Without Parcel-by-Parcel Precision
Governor Newsom signed Assembly Bill 2180 on September 27, 2026, adding Government Code section 53751.5 to the Proposition 218 Omnibus Implementation Act. AB 2180 clarifies how to comply with Proposition 218’s proportionality and cost of service requirements. It also describes consistent methodologies for allocating costs of service.
Proposition 218 and Recent Water-Rate Decisions
Proposition 218 provides that a property-related fee may not exceed the proportional cost of the service attributable to parcel and places on the local agency the burden of demonstrating compliance with that proportionality requirement. Although some courts have recognized that rate-setting does not require mathematical precision and that tiered pricing (pricing that increases with use or demand) may be permissible, some decisions created uncertainty regarding the level of evidence necessary to demonstrate compliance.
In Coziahr v. Otay Water District and Patz v. City of San Diego, two appellate courts found an insufficient connection between the agencies’ tiered water rates and the cost of customers’ service at each level of use. By contrast, in Dreher v. City of Los Angeles Department of Water and Power, the court upheld tiered rates supported by general customer characteristics, usage budgets, peak-demand factors and systemwide data. In doing so, Dreher rejected the strict approach in Coziahr and Patz in several key respects. It recognized that local governments may demonstrate compliance with Proposition 218 through reasonable methodologies for allocating the cost of service. The California Supreme Court granted review of Dreher in March 2026. That review is still pending.
AB 2180 Establishes a Reasonable Allocation Framework
AB 2180 codifies many of the allocation principles recognized in Dreher and provides a more practical framework for demonstrating proportionality. For any fee or charge adopted under article XIII D, section 6, proportional cost may be demonstrated by any method that reasonably allocates the ascertainable costs of providing service to all parcels. The allocation must be supported by historic, existing, estimated or projected data that reasonably captures the cost of service.
For water and sewer rates, this means that an agency need not provide an exact measure of the cost of service at each parcel. It may impose uniform or tiered rates on classes defined by common characteristics indicative of likely use, including the nature and size of improvements, land use, plumbing fixtures, meter size and peak-use characteristics.
For tiered water rates, the proportional cost of service within each tier may be substantiated using any reasonable basis for allocating costs attributed to the tier. The statute identifies the cost of obtaining water from various sources, facility operation, maintenance and construction costs; systemwide peak demand; and costs associated with higher use, conservation, demand management or incremental water service as permissible bases for allocating costs among tiers.
AB 2180 also distinguishes a tier breakpoint – the point at which a customer moves from one tier to another – from the rate charged within the tier. No cost-based or other justification is required for establishing a tier breakpoint. But each tier's rate may still not exceed the proportional cost reasonably allocated to parcels subject to that tier.
What AB 2180 Means for Local Governments
Agencies retain flexibility but the administrative record remains critical. AB 2180 provides that an exact measure of cost at each parcel is unnecessary. But local governments should continue to develop a strong evidentiary record identify the methodology, data, assumptions and cost allocations supporting their rates and capable of withstanding independent judicial review.
Tier breakpoints and tier pricing are separate inquiries. Where a tier begins or ends requires no independent cost justification. The costs allocated to each tier and the resulting rate still require support, and the rate may not exceed the proportional cost of service allocated to the parcels subject to that tier.
Agencies may use customer classes and reasonable data to allocate costs. Water and sewer agencies may group customers based on common characteristics indicative of likely use. In allocating costs among those customers, agencies may rely on historic, current, estimated or projected data. Rate studies should explain how the data reasonably captures the cost of the service being provided.
Peak-demand, infrastructure and conservation-related costs may support tiers. Tiered rates are not limited to source-of-supply differences. Properly supported operation, maintenance, construction, peak-demand, conservation and demand-management costs may also be allocated among tiers.
Proposition 218 remains controlling. AB 2180 does not eliminate the local governments’ burden of proof or authorize rates exceeding the proportional cost of service. Rather, it clarifies the methods and evidence an agency may use to demonstrate proportionality. Agencies should review existing rate studies and upcoming rate proceedings in light of this new statutory framework.
AB 2180 is new and has not yet been judicially interpreted. AB 2180 is a new law and courts have not yet had a chance to interpret Government Code section 53751.5. On September 30, 2026, the California Supreme Court requested supplemental briefing in Dreher concerning the impact of AB 2180 on the issues before the Court. That briefing may provide an early opportunity for the Court to provide guidance regarding the new statute. Agencies should continue to monitor Dreher and case law for future developments.
For questions about AB 2180 or how it may affect your agency's rates, rate study or pending litigation, please contact Lutfi Kharuf, Dean Atyia, Evelyn Blanco or Chloe Graham.
