A state appellate court has upheld a Santa Clara Valley Water District rate increase as exempt from the California Environmental Quality Act, rejecting multiple arguments from a retail water company that the increase was subject to environmental review.

Created by state law, the Santa Clara Valley Water District provides wholesale water to various retail water suppliers. The district also manages the groundwater basin by recharging the aquifer and by providing treated surface water so that other entities limit their groundwater pumping. The district has authority to levy a fee on water extracted from the groundwater basin.

In March 2006, the water district submitted its annual report for the upcoming fiscal year to the Board of Supervisors. The report contained the staff's recommendations and analysis concerning groundwater-charge rate increases for the 2006-07 fiscal year. The staff recommended for a "low case" scenario for potential rate increases of about 3% to 7%, and against a "high case" scenario that would fund additional operations and capital investments. Staff also recommended increasing surcharges on treated water, partly to reduce treated water sales because the groundwater basin was full at the time.

Great Oaks Water Company submitted a formal written objection to the rate increases, arguing they were being used to affect groundwater levels and were therefore subject to environmental review.  Great Oaks is a private utility that serves 100,000 residential, commercial and industrial customers with water extracted from the company's wells in Santa Clara County. The water company is subject to the district's groundwater charges.

After several meetings, the district's Board of Directors accepted the staff's recommendations and approved the rate increases in June 2006. The board made findings that the charges were exempt from CEQA review because the charges were for meeting operating expenses, purchasing supplies, meeting financial reserve needs and completing capital projects necessary to maintain services within existing service areas. The district essentially cited the CEQA exemptions for rate setting found in Public Resource Code § 21080, subdivision (b)(8).

Great Oaks sued, arguing that the district's CEQA findings were inadequate and not supported by substantial evidence, and that the rate increases were adopted for purposes requiring CEQA review. A Santa Clara County Superior Court judge rejected the contentions, as did a unanimous three-judge panel of the Sixth District Court of Appeal.

Great Oaks argued the findings were inadequate because the district did not cite specific facts in the record to support the exemption. The court disagreed and pointed to the standard the state Supreme Court established in Environmental Protection & Information Center v. California Dept. of Forestry & Fire Protection, (2008) 44 Cal.4th 459. In that case, the court ruled that it was acceptable for an agency's findings to refer generally to the administrative record, even though specific references would be the better practice. What matters, the court ruled, was "the analytic route the administrative agency traveled from evidence to action."

The Santa Clara district passed this test, the Sixth District ruled. The water district identified statutory purposes for which it claimed the exemption, and referred to portions of the annual report and other information from the hearing process to support those purposes. "In other words," Justice Wendy Duffy wrote for the court, "based on the totality of the resolution's findings, we can readily ascertain the analytic route that the district traveled from evidence to action."

Great Oaks argued substantial evidence did not support the findings, and it pointed to evidence the district used rates to manipulate groundwater supplies and expand the district's services. The court rejected the contention, concluding the "annual report alone contains substantial evidence supporting the district's findings that the groundwater-charge rate increases were for statutorily exempt purposes."

"Even if the record shows that the district was effectuating groundwater management policy through its groundwater rates," Duffy continued, "as long as its stated purpose for the use of the funds raised via the rate increases fell within the scope of the statutory exemption, the district's action remained exempt."

Great Oaks pointed to evidence the district had used past capital expenditures to expand services, but the court said past practices did not matter here because Great Oaks failed "to provide linkage between these past expenditures or projects and the funds to be received in the future from the proposed groundwater rate increases."

The Case:
Great Oaks Water Co. v. Santa Clara Valley Water Dist., No. H032067, 09 C.D.O.S. 1179, 2009 DJDAR 1363. Filed January 28, 2009.
The Lawyers:
For Great Oaks: Jeffrey Lawson, Silicon Valley Law Group, (408) 573-5700.
For the district: Thomas Berliner, Duane Morris, (415) 371-2200.