State Supreme Court Rules in Water Rights Fee Case

The California Supreme Court ruled Jan. 31 that statutes under which the State Water Resources Control Board imposed water rights fees in 2003 are constitutional. In the long-awaited opinion, the Supreme Court affirmed a Court of Appeal judgment on the constitutionality of the fee statutes but said it did not have enough information to determine whether the fee formula devised by the State Board was valid.

Plaintiffs in the case, known as California Farm Bureau Federation v. State Water Resources Control Board, alleged that both the fee legislation and regulations to implement it are unconstitutional and invalid. ACWA submitted an amicus brief in support of the plaintiffs, which included the Farm Bureau, the Northern California Water Association and the Central Valley Project Water Association. ACWA argued that the State Board’s annual water rights fee structure is unlawful because the fees are not reasonably tailored to the benefits water rights holders receive from the water rights program, thus constituting an impermissible tax.

The Legislature enacted a bill in 2003 directing the State Board to devise a formula and institute fees on water rights holders to fund the Board’s Division of Water Rights. The fees were intended to fund water rights activities so that state general fund dollars historically used for those activities could be directed to other state programs.

The trial court upheld the fees in their entirety in 2005. In January 2007, the Third District Court of Appeal partially overturned the trial court’s decision, upholding the fee statute in its entirety but invalidating the emergency regulations adopted by the State Board that established the amount of fees water rights holders were to pay annually. The Court of Appeal also invalidated regulations that established water rights fees for CVP contractors and concluded there were limitations on the amount of fees that could be passed through to contractors by the Board.

The State Board appealed the decision, and the Supreme Court granted review in 2007.

In the Jan 31 ruling, the Supreme Court rejected the plaintiffs’ argument that the water rights fees system is unconstitutional as a matter of law. Under California law, the State Board clearly has the authority to formulate a legally defensible fee structure for water rights holders.

Regarding the fee structure as applied, the Supreme Court emphasized that regulatory fees (such as the State Board’s) are proper only as long as there is a reasonable relationship between the fees and the benefits received by those paying the fees. In this case, however, the trial court didn’t develop a sufficient factual record to determine the extent to which the fees are defensible, and the matter is therefore being remanded back to the trial court to make specific findings on the issue.

A particularly thorny issue in the case is whether the State Board’s fees on federal water contractors are legal, given that the licenses and permits are owned by the federal government, which has sovereign immunity from state taxes and fees. The Supreme Court held that sovereign immunity does not extend to the contractors, who may be subject to properly calculated fees. The contractors’ fees were relatively high compared with most other right holders because the State Board charged the contractors based on the face value of the federal government’s water rights, not on the contractors’ contractual entitlement, which is much lower.

Since the matter now returns to the trial court to determine the factual record on remand, it will likely be several years before there is a final ruling on whether the annual water rights fees are legally defensible.