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Parched California Takes Aim at Water Rate ‘Bounty Hunter’ Suits

Oct. 7, 2021, 10:00 AM

California water utilities say a new four-month window for consumers to challenge rate hikes will restrict costly court battles as they face the twin challenges of historic drought and devastating wildfires.

Water and sewer agencies for years have been exposed to lawsuits brought up to a decade after their rates were adopted, said Claire Collins, partner with Hanson Bridgett LLP in Los Angeles. The result has created financial uncertainty and put extraordinary pressure on agencies to modify rates in light of the ever-changing standards articulated by courts—something that a new law is intended to help alleviate.

“These types of cases are increasing in frequency, making it even harder for us to ensure we can pass fair and reasonable rates to cover the cost of operating the water system,” Collins said.

But the lawyer who filed the largest pending suit over water rate increases calls the 120-day statute-of-limitations “terribly anti-consumer.” He said it will let California water agencies evade a 25-year-old citizens’ initiative and “set rates that are unlawful, collect the money, and never pay it back.”

‘It Takes Time’

S.B. 323, which takes effect Jan. 1, 2022, “intentionally” makes it more difficult for lawyers to reach out to consumers, said Don Driscoll of Driscoll & Omens in Albany, Calif.

“It takes time for people to develop an interest in making a rate challenge,” he said.

Driscoll is lead plaintiffs’ attorney in a sprawling case against water agencies for violating Proposition 218, the 1996 voter-approved citizens’ initiative that bars local governments from enacting revenue-raising measures to pay for general government services rather than property-related services.

Driscoll collected more than a million dollars in legal fees in 2015 after suing more than 120 school districts across California for allegedly failing to provide schoolchildren with the physical education hours required by state law. The legislature later passed a law to make it harder to sue school districts on those grounds.

Now he and other lawyers who advertised for potential clients on social media—derided by critics as water law “bounty hunters”—could potentially win millions in attorney’s fees or a proportion of the challenged amounts. Some of the allegations date to rate hikes going back a decade.

Proposition 218

Because public water agencies don’t make a profit, the lawsuits against water utilities under Proposition 18 have cost “millions of dollars that all are ultimately paid by ratepayers,” Collins said.

“They’re winning these cases,” she said. “And they’re being decided in such a way that it incentivizes more of them to come forward.”

Driscoll represents more than 100 water customers in a case against 77 water agencies throughout the state. He filed an amended complaint in the case in June, and a hearing on a demurrer motion is scheduled for December in the state Superior Court, Santa Clara County.Kessner v. City of Santa Clara, Cal. Super. Ct., No. 20CV364054, Amended complaint 6/24/21

Proposition 218 prohibits the water agencies from imposing fees for property-related services that exceed the cost of the service, unless the fees are voter-approved, the complaint said. Driscoll said the agencies are unlawfully using a rate methodology that causes retail water customers to pay more than the cost.

Fire Service

The methodology results in subsidies for government and general governmental services, including public fire water service, he said.

“Public fire water service is not a property-related service,” he said.

Driscoll told Bloomberg Environment that he solicited clients for the case on his Facebook page. “It’s important for maintaining contact with people,” he said. “Consumers use the internet and they seem to be comfortable with it.”

As to the characterization of being a bounty hunter, Driscoll said: “The defendants’ lawyers are being paid to represent government agencies engaged in unconstitutional behavior, and they get paid whether they win or lose.”

Plaintiffs’ lawyers, by contrast, “are paid only in an amount a judge allows, and only if they succeed in creating a benefit for consumers.”

Driscoll said in the school district case the lawyers representing the schools made a lot more money than he did.

‘Create Benefit’

Amid the uncertainty of water scarcity and wildfires, the state’s public water agencies are “sizing their systems to help ensure that if there is a fire, water can be delivered in sufficient quantities and at sufficient pressure,” said Lutfi Kharuf of Best, Best & Krieger in San Diego.

Kharuf represents 16 of the defendants in the Kessner case. He said the California Courts of Appeal, in an unpublished ruling involving the city of Glendale, said the delivery of water through a public hydrant is a property-related service, and charging a public fire protection fee is lawful.

Because the ruling was unpublished, the question could be decided in Kessner as a case of first impression, he said.

The new law doesn’t apply to Kessner, which—like other rate-challenge lawsuits—will be expensive for agencies to defend.

“We are seeing cases filed by attorneys claiming refunds for every customer in the district,” said Ryan T. Dunn of Colantuono, Highsmith & Whatley PC. “They never raised issues during hearings about rates increases.”

Class Incentives

Even aside from legal expenses, the refunds can stretch back several years and accrue interest while cases are pending, he said.

“When these are brought as class actions, the plaintiffs’ attorney gets a quarter or a third in fees. There’s a lot of incentives for the class action bar to bring these as class actions, when they’re taking a fraction of the total award.”

To take advantage of the protections provided by S.B. 323, retail water and wastewater agencies must include in their proposed rate increase notice a statement that there is a 120-day statute of limitations to challenge any new, increased, or extended fee or charge, Collins said.

Water for fire service should be paid for by the cities themselves, Driscoll said.

“If that were the case, you wouldn’t get the regressive effect you get from charging every water customer the same amount for public water service,” he said.

Rate-setting is extremely complex, and consumers are not in a position to challenge rate hikes, Driscoll said.

“Attorneys play a huge role in helping to enforce the law,” he said, adding that the new law “concerns me deeply.”

To contact the reporter on this story: Tripp Baltz in Denver at abaltz@bloomberglaw.com

To contact the editors responsible for this story: Chuck McCutcheon at cmccutcheon@bloombergindustry.com; Gregory Henderson at ghenderson@bloombergindustry.com