San Diego forced to abandon tiered water rates, pay $40m settlement after Prop 218 court loss

San Diego forced to abandon tiered water rates, pay $40m settlement after Prop 218 court lossThe city council has reluctantly scheduled a public hearing to adopt a flat volumetric rate structure, complying with an appellate court ruling that officials warn will penalize low-volume users and undermine conservation efforts.

The city must pay a $40 million settlement from its water utility fund, which may require deferring $30 million in capital improvement projects.

The transition to a unitary rate will increase average monthly bills for low-volume single-family users by 7.1%, while high-volume users will see a 5.9% decrease.

Overall revenue requirements remain unchanged, aligning with a previously approved 14.5% rate increase taking effect January 1, 2027.

A public hearing for the rate adjustment is set for October 6, 2026, with Proposition 218 notices mailing to roughly 286,000 customers.

The San Diego City Council voted 7-1 on July 14 to initiate a Proposition 218 process to transition its water enterprise to a unitary rate structure and absorb a $40 million legal settlement, following a definitive court defeat over its tiered pricing model. The sweeping rate adjustment is mandated by the outcome of Pats v. City of San Diego, an 11-year legal battle in which high-volume single-family residential users successfully challenged the city's tiered water rates. After the California Supreme Court denied the city's petition for review in October 2025, San Diego exhausted all legal remedies and was ordered to implement a flat volumetric rate across all customer classes. Interim Public Utilities Department Director Lisa Salaya explained that while the city's methodology followed standard American Water Works Association (AWWA) M1 principles, the courts ruled it did not meet Proposition 218's strict evidentiary burden. The standard effectively requires direct proof that every allocation exactly corresponds to the proportional cost of service. The shift to a unitary rate will not increase the utility's overall revenue requirement, which remains tied to a previously approved 14.5% rate increase taking effect January 1, 2027. However, the cost burden will shift significantly among ratepayers. Low-volume single-family users face an estimated 7.1% ($5.62) monthly increase, while high-volume users will see a 5.9% ($19.52) decrease. Multi-family properties and irrigation customers will also see slight decreases. The city must also pay a $40 million settlement covering plaintiffs' attorneys and customer refunds. Because the settlement will be funded entirely through the water utility fund, officials are currently evaluating whether to defer approximately $30 million in capital improvement program (CIP) water projects to offset the financial hit. Council members expressed deep frustration with the mandate, noting it actively penalizes conservation. Several members echoed the appellate court's dissenting judge, who warned the decision exceeds traditional engineering standards and could make tiered water rates nearly impossible for agencies to defend statewide. "The Pats v. City of San Diego decision undermines one of the most effective tools that cities have to encourage water conservation, which is pricing that rewards people who use less water," one council member noted. "We shouldn't be charging customers the same rate as high-use customers." To help mitigate future impacts, the Public Utilities Department is aggressively pursuing non-rate revenue opportunities. Staff confirmed they are currently renegotiating 17 active leases on utility assets and evaluating power purchase agreements at the Alvarado and Otay water treatment plants to secure better deals. The city will mail Proposition 218 notices to approximately 286,000 customers in late July, ahead of the formal public hearing scheduled for October 6, 2026.