Great Oaks Water Co. v. Santa Clara Valley Water District

Full title: GREAT OAKS WATER COMPANY, Plaintiff and Respondent, v. SANTA CLARA VALLEY…

Court: COURT OF APPEAL OF THE STATE OF CALIFORNIA SIXTH APPELLATE DISTRICT

Date published: Nov 8, 2018

No. H035260 (Cal. Ct. App. Nov. 8, 2018)

Opinion

H035260

11-08-2018

GREAT OAKS WATER COMPANY, Plaintiff and Respondent, v. SANTA CLARA VALLEY WATER DISTRICT, Defendant and Appellant.

ELIA, J.

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Santa Clara County Super. Ct. No. 1-05-CV-053142)

Plaintiff Great Oaks Water Company (Great Oaks), a water retailer, brought this action challenging groundwater charges imposed on water it extracts from wells on its property. The power to impose such charges is vested in defendant Santa Clara Valley Water District (District), under the Santa Clara Valley Water District Act (District Act or Act) (West's Ann. Wat.—Appen. (1999 ed.) ch. 60, p. 354 et seq., West's Ann. Wat.—Appen. (2017 supp.) ch. 60, p. 11 et seq.).¹ Among the District's major responsibilities is preventing depletion of the aquifers from which Great Oaks extracts the water it sells. The trial court awarded a complete refund of the charges paid by Great Oaks, or in the alternative a partial refund, on the grounds that the charge violated the provisions of both article XIII D of the California Constitution (article XIII D)² and the District Act. Article XIII D imposes procedural and substantive constraints on fees and charges imposed by local public entities.

1 All further statutory references are to the District Act appearing in West's Annotated Water Appendix chapter 60 unless otherwise specified. The District Act was originally enacted in 1951 (Stats. 1951, ch. 1405, p. 3336 et seq.) and has been amended many times since then. Provisions relating to groundwater charges (§§ 26-26.16) were added in 1962 (Stats. 1963, 1st Ex. Sess. 1962, ch. 38, §§ 7-23, pp. 270-277), and some of those provisions were subsequently amended. A provision adding enforcement powers related to groundwater charges (§ 26.17) was enacted in 1965. (Stats. 1965, ch. 1466, § 9, p. 3431.)

2 All further references to an article are to an article of the California Constitution.

In this case, we previously held, among other things, that (1) the groundwater charges were fees or charges for property related services for purposes of article XIII D and thus subject to some of the constraints of that article and (2) the record failed to show that the groundwater charges violated the District Act because they were arbitrary, capricious, or unsupported by the evidence. We reversed the judgment and remanded for further proceedings consistent with our opinion. The California Supreme Court granted review in this matter (S231846) and deferred briefing pending its decision in another case. The Supreme Court ultimately transferred this cause to this court with directions to vacate our decision and reconsider it in light of City of San Buenaventura v. United Water Conservation Dist. (2017) 3 Cal.5th 1191 (San Buenaventura).

Upon thorough reconsideration, we now conclude that the groundwater charges authorized by section 26 are not fees or charges for "property-related services" that fall within the scope of article XIII D. We also conclude, as we did previously, that the record does not support the trial court's findings of violations of the District Act. Accordingly, we reverse the judgment.³

3 Great Oak's motion to strike portions of the District's response to its supplemental brief filed October 14, 2011 is denied.

I

Background

A. The District Act

Prior to adoption of the District Act, the Santa Clara Valley was plagued by overdraft of the underlying groundwater basin, causing among other things the subsidence of land—with resulting disruption of roads and structures—and the intrusion of saltwater into groundwater aquifers.⁴ In 1951, the Legislature created the District by adopting the District Act by urgency measure.⁵ (Stats. 1951, ch. 1405, pp. 3336-3355.) The District's territory is coextensive with the County of Santa Clara. (§ 2.) A purpose of the Act is to "provide comprehensive water management for all beneficial uses." (§ 4.) To this end, the District may take action to, among other things, "[p]rovide for the conservation and management of . . . water . . . for beneficial and useful purposes, including spreading, storing, retaining, and causing the waters to percolate into the soil within the district" (§ 4), "[p]rotect, save, store, recycle, distribute, transfer, exchange, manage, and conserve in any manner any of the waters" (ibid.), "[i]ncrease and prevent the waste or diminution of the water supply in the district (ibid.), and "[o]btain, retain, protect, and recycle drainage, stormwater, floodwater, or treated wastewater, or other water from any sources, within or outside the watershed in which the district is located for any beneficial uses within the district" (ibid.).

4 According to a 1987 report submitted below by the District, "[g]roundwater pumpage increased from 40,000 acre-feet per year in 1915 to 180,000 acre-feet per year in the 1960's," resulting in a lowering of the "artesian head" from "near ground surface" to some 150 to 200 feet in depth. "This drawdown caused a maximum of almost 13 feet of irreversible land subsidence in San Jose by 1969." Saline groundwater, reflecting seawater intrusion, was detected near Palo Alto in 1910, and by 1987 extended east to Milpitas and "south along the Guadalupe River to the San Jose Municipal Airport."

5 The Act was originally entitled "Santa Clara County Flood Control and Water Conservation District Act" (Stats. 1951, ch. 1405, § 1, p. 3337) and the District was named accordingly. (Stats. 1951, ch. 1405, § 2, p. 3337.) But even then, among the Act's purposes were to conserve floodwater and storm water "for beneficial and useful purposes by spreading, storing, retaining, and causing such waters to percolate into the soil within the district," "to save and conserve" such waters, "to increase and prevent the waste or diminution of the water supply in the district, and to obtain, retain and reclaim drainage, storm, flood or other waters . . . from any sources, within or without the watershed in which the district is located for beneficial use within the district." (Stats. 1951, ch. 1405, § 4, pp. 3337-3338.) The district was later designated a flood control and water district (Stats. 1967, ch. 205, § 1, p. 1312), and in 1973, the act was renamed the Santa Clara Valley Water District Act and the district was renamed the Santa Clara Valley Water District. (Stats. 1973, ch. 56, §§ 1, 2, pp. 92-93.) The district is still designated a "flood control and water district." (§ 2.)

The Act empowers the District to establish zones of benefit within its boundaries and to "institute zone projects for the specific benefit of such zones." (§ 3.) It empowers the District to levy property taxes and assessments to pay its general operating costs and activities "of common benefit to the district." (§ 13, subd. 1.) It also grants the District the power "to levy and collect a ground water charge for the production of water from the ground water supplies within a zone or zones of the district which will benefit from the recharge of underground water supplies or the distribution of imported water in such zone or zones."⁶ (§ 26.) The Act declares such charges to be "in furtherance of district activities in the protection and augmentation of the water supplies for users within a zone or zones of the district which are necessary for the public health, welfare and safety of the people of this State." (§ 26.3.) It authorizes their imposition "upon the production of ground water from all water-producing facilities, whether public or private, within said zone or zones of the district for the benefit of all who rely directly or indirectly upon the ground water supplies of such zone or zones and water imported into such zone or zones." (Ibid.) The proceeds of such charges are to be used "exclusively" for four enumerated purposes, discussed in greater detail below. (Ibid.)

6 For purposes of the District Act, " 'Groundwater' means nonsaline water beneath the natural surface of the ground, whether or not flowing through known and definite channels." (§ 26.1.) In general, " '[p]roduction' or 'producing' means the extraction or extracting of groundwater, by pumping or any other method . . . ." (Ibid.) The phrase " '[w]ater-producing facility' means any device or method, mechanical or otherwise, for the production of water from the groundwater supplies within the district or a zone thereof." (Ibid.)

The Act requires the District to issue an annual report containing "a recommendation as to whether or not a groundwater charge should be levied in any zone or zones of the district during the ensuing water year and, if any groundwater charge is recommended, a proposal of a rate or rates per acre-foot for agricultural water and a rate or rates per acre-foot for all water other than agricultural water for the zone or zones . . . ."⁷ (§ 26.5, subd. (a).) The annual report must also "report upon the district's activities in the protection and augmentation of the water supplies of the district." (Ibid.)

7 The Act also provides for midyear adjustments to the charge, following similar procedures, "whenever the board determines that the imposition or adjustment of the charge is necessary." (§ 26.7, subd. (b)(1).) "As used in connection with the groundwater charge," " '[a]gricultural water' means water primarily used in the commercial production of agricultural crops or livestock." (§ 26.1.)

"The report shall not contain a recommendation of any increases in proportion to increased production [of groundwater] in a zone unless based upon an analysis showing the cause of the reduction in the groundwater levels of the zone requiring the increases, with attention given to the effect of extractions of pumpers outside of, as well as within the zone, and with an evaluation of alternative measures which may feasibly be taken within the entire affected groundwater basin and of any alternative supplies of water available for that zone, including the availability of treated water supplied by the district or treated groundwaters or groundwaters extracted in a cleanup operation and available to the district for reuse." (§ 26.5, subd. (b).) The report must include "(1) [t]he amount of groundwater produced in the proposed zone and alternative water sources" (ibid.), "(2) [t]he estimated costs of recharging each zone or zones" (ibid.), "(3) [t]he estimated costs of mitigating any effects of pumping" (ibid.), and "(4) [i]nformation specifying the benefits that have been received and will be received within the zone or zones where a groundwater charge has been levied and collected, or is recommended to be levied and collected." (Ibid.)

The District is required to publish the report by the first Tuesday of April and to hold a hearing on it on the fourth Tuesday of April, following notice to the public with "an invitation to all operators of water-producing facilities . . . and to any person interested in the district's activities . . . to call at the offices of the district to examine the report." (§ 26.6.) At the hearing, any operator of a water-producing facility, or other interested person, may "appear and submit evidence concerning the subject of the written report." (§ 26.6.) Before the end of a "water year," defined as July 1 through June 30 (§ 26.1), the board must "determine whether or not a groundwater charge should be levied in any zone or zones." (§ 26.7, subd. (a)(1).) "If the board determines that a groundwater charge should be levied, it shall levy, assess, and affix the charge or charges against all persons operating groundwater-producing facilities within the zone or zones during the ensuing water year." (§ 26.7, subd. (a)(2).) The rate within a given zone is to be uniform, except that the rate for agricultural water "shall not exceed one-fourth of the rate" for nonagricultural water. (§ 26.7, subd. (a)(3)(D).)

The Act declares that monetary claims against the District "are governed by Part 3 (commencing with [s]ection 900) [Claims Against Public Entities] and Part 4 (commencing with [s]ection 940) [Actions Against Public Entities and Public Employees] of Division 3.6 of Title 1 of the Government Code, except as provided therein. Claims not governed thereby or by other statutes or by ordinances or regulations . . . shall be prepared and presented to the governing body, and all claims shall be audited and paid, in the same manner and with the same effect as are similar claims against the county." (§ 30.) B. District's Zones

Great Oaks asserted in its trial brief—and the District has never denied—that the District has only two permanent zones, designated "W-2" and "W-5." Great Oaks described zone W-2 as comprising approximately 240 square miles in the northern part of the county, while W-5 consists of about 14 square miles in the southern part. They are sometimes referred to as the "North County" zone and the "South County" zone, respectively.

At the time of trial, Great Oaks operated 19 wells, of which 16 were in zone W-2 and three were in zone W-5. C. Notice and Hearings on 2005-2006 Charge

On or about March 1, 2005, the District mailed a "notice of hearings on groundwater charges for 2005-2006" to approximately 4,500 well owners in the county. According to later recitals by the board, the accuracy of which is not contested, the written report required by section 26.5 of the Act was duly prepared, and the report was delivered to the clerk of the board on March 22, 2005. The board thereafter held hearings on the proposed rates on April 5, April 11, and April 19. On April 19, 2005, the board adopted resolution 05-28 setting groundwater charges for 2005-2006. For groundwater extractions in zone W-2, the per-acre-foot charge was $420 for nonagricultural water and $42 for agricultural water. In zone W-5 the respective charges were $215 and $21.50. D. Pre-Suit Claim

On May 20, 2005, Great Oaks submitted a claim to the District under Government Code section 900 et seq. The sole stated ground for recovery was that the District was "illegally using pump tax revenues for purposes outside the four (4) statutorily specified uses, and that to cover those unauthorized expenditures the amount of the pump tax is excessive." It was further asserted that the District had "damaged Great Oaks by requiring it to pay more than necessary for the pump tax," such that the District was "indebted to Great Oaks for the amount it charged over and above what was necessary to fulfill the statutorily listed uses for pump tax revenues." The claim concluded with the statement, "Great Oaks hereby makes a claim for the refund of the amount which it was overcharged for the pump tax and requests that the [District] lower the pump tax and modify its uses of pump tax revenues to come into conformity with the Act." The District took no action on the claim, causing its rejection by operation of law. (See Gov. Code, § 912.4, subds. (a), (c).) E. Proceedings Below

Great Oaks filed this action on November 22, 2005. The matter was tried on an amended complaint, filed January 19, 2006, asserting eight causes of action: (1) "Demand for Refund," in that the District was (a) using charges for purposes not authorized by section 26.3, including flood control and revenue pooling; (b) including costs of treated water in the groundwater charge; and (c) imposing an improper tax "in violation of California Constitution Article XIII"⁸; (2) "Improper Pooling of Groundwater Charges" in a common fund with other revenues, in alleged violation of section 26 of the District Act; (3) "Failure to Assess and Collect Groundwater Charge Revenue" from dewatering facilities, in alleged violation of section 26.1; (4) "Unfair Competition," in that the District was "setting and collecting groundwater charges to encourage the purchase of its treated surface water"; (5) "Injunction" prohibiting the District from (a) spending groundwater proceeds for uses not authorized by the Act; (b) failing to prohibit the waste of water; (c) using groundwater proceeds to subsidize production of treated water; and (d) failing to obtain voter approval for increases "as required by Article XIII of the California Constitution"⁹; (6) "Declaratory Relief" regarding "the appropriate components of the groundwater charge and the requirements for an affirmative public vote on groundwater charge or tax assessments proposed by the District in excess of [the District Act's] [s]ection 26 limits"; (7) "Petition for Writ of Mandate" in that the District had abused its discretion "(a) in collecting groundwater charges in excess of the benefits provided to Great Oaks; (b) in creating groundwater charge zones without consideration of whether Great Oaks uses treated surface water; (c) in not collecting groundwater charges as described above; (d) [in] failing to regularly obtain a favorable vote of zone residents before increasing groundwater charges; and (e) in spending the monies collected by the groundwater charge for purposes not authorized by §26.3 of the [District] Act, including but not limited to flood control and revenue pooling"; and (8) "Request for Attorneys Fees." in that Great Oaks was prosecuting the action on behalf of ratepayers and therefore entitled to fees under Code of Civil Procedure section 1021.5.

8 Great Oaks repeatedly referred to "Article XIII" of the California Constitution when it meant article XIII D. Article XIII D is not a subsection of article XIII, as sometimes suggested at trial.

9 See ante, fn. 8.

A demurrer by the District was sustained without leave to amend as to the unfair competition cause of action, and the demurrer was otherwise overruled. The District answered the remaining causes of action, generally denying them and asserting 46 affirmative defenses, including failure to give timely and proper notice of all claims under Government Code section 905.

On June 12, 2008, the parties filed a joint case management statement requesting trial in two phases, the first addressing specified "threshold issues" and the second concerning "appropriate remedies, and any remaining non-substantive issues." The issues to be addressed in "Phase I" were "(a) Whether the District has violated the District Act, including whether the District abused its discretion, or the Act, in the manner in which it accounts for the collection, use and allocation of groundwater charges; [¶] (b) Whether the District has violated Article XIII of the California Constitution; [¶] [and] (c) Whether the District is required under the District Act to prevent the waste of water under the Water Code and collect groundwater charges for dewatering wells in Santa Clara County."¹⁰ The statement set forth a briefing schedule for these issues and recited the parties' agreement that "with respect to the issues above, to the extent that Great Oaks does not address in its opening brief a specific expenditure or allocation, or other specific budget item, it will be barred from challenging that item in this case; and to the extent that the District does not raise a defense in its opposition brief, it will be barred from asserting that defense as to the issues tried in Phase 1."

10 See ante, fn. 8.

Great Oaks filed a trial brief arguing that the groundwater charge was unlawful in several respects. In the brief, Great Oaks posited that the charge was imposed on an incident of property ownership and consequently subject to the requirements of article XIII D. Great Oaks contended that the District had violated that provision by failing to secure voter approval for the charge and failing to give notice and hearing conforming to the article's requirements. It also contended that the charges violated the substantive constraints of article XIII D in that it exceeded the proportionate costs attributable to Great Oaks, included charges for services not used by or immediately available to Great Oaks, and exceeded the funds required to provide the property-related services. (See art. XIII D, § 6, subd. (b)(1).)

Great Oaks further contended that the charge violated the District Act in numerous respects. The alleged violations included the District's (1) failure to define zones according to benefits received, as contemplated by the Act; (2) failure to tie the groundwater charge to benefits actually conferred on groundwater supplies; (3) inclusion of costs of treating surface water in the groundwater charge even though Great Oaks received no benefit from such treatment; (4) use of the proceeds of groundwater charges for purposes other than those authorized by the District Act, including Water Utility Enterprise functions and Watershed Fund projects; (5) use of Water Utility Enterprise Fund monies, including groundwater charge proceeds, to cover a loss of revenues occasioned by the state's interception of $51 million in property taxes; (6) use of Water Utility Enterprise Fund monies, including groundwater charge proceeds, to pay about one-sixth of the "general fund overhead," which in turn was applied to such projects as a childcare center, solar energy project, residential property, and marketing; (7) reliance on a "pooling policy" in violation of the District Act's restrictions on the use of groundwater charge revenues and in excess of the District's powers under the Act; and (8) failure to assess the groundwater charge on extractions for dewatering purposes, in violation of section 26.1 of the District Act, which requires that the charge be levied on all water-producing facilities.

By stipulation of the parties, thousands of pages of documentary evidence, including declarations and deposition excerpts, were admitted into evidence in addition to the live testimony offered at trial in support of their respective positions. On June 9, 2009, the trial court issued an amended statement of decision on Phase 1. The trial court concluded that the groundwater charge was subject to article XIII D because it was "remarkably similar" to the one that this court had held subject to that article in Pajaro Valley Water Mgmt. Agency v. Amrhein (2007) 150 Cal.App.4th 1364 (Amrhein) (subsequently disapproved in San Buenaventura, supra, 3 Cal.5th at p. 1209, fn. 6). The trial court rejected the District's contention that the charge was one for water services and thus exempt from article XIII D's voter approval requirement. It also rejected the contention that the charge fell outside article XIII D insofar as Great Oaks incurred it due to a business activity. It found that the charge did not serve "a significant regulatory purpose." Therefore, the court concluded, the District had violated article XIII D by failing to give the notice prescribed in that provision and by failing to secure the prescribed approval by voters or affected owners.

The trial court rejected many of Great Oaks's claims concerning violations of the District Act. However, it found persuasive Great Oaks's contentions that the District had abused its discretion and violated the District Act when it based the groundwater charge not upon a cost-of-service analysis but upon erroneous suppositions about the extent of benefits conferred. The court noted that the District had failed to change its rate-setting methodology despite an independent audit in 2000, which had concluded that the revenue recovered from some classes of customers might be subsidizing others and recommended that the District "review its agricultural water pricing practice for adequacy and fairness." The court also concluded that the District had "improperly used groundwater revenue for activities not within the scope of [s]ection 26.3 of the [District] Act," "unwisely commingled groundwater revenue with other monies," and overbudgeted for specific items, then failed to credit the resulting surpluses back to Great Oaks.

The trial court rejected the District's contention that Great Oaks had failed to exhaust its administrative remedies, finding that the pre-suit claim submitted by Great Oaks "complied with both the Government Code and [s]ection 30 of the District Act."

On February 3, 2010, following the "Phase II" proceedings, the trial court's judgment was filed. It awarded Great Oaks "a refund of groundwater charges in the amount of $4,623,095.52 plus interest." It also awarded $1,306,830 "under the District Act," but recited that the two awards were made "in the alternative," such that Great Oaks could recover one or the other, "but not both." The judgment included a declaration that "(1) The District was required to comply with [a]rticle XIII D before imposing the groundwater charge. The District imposed the groundwater charge without complying with [article] XIII D, [s]ection 6, including the failure to secure proper voter approval both by failing to comply with proper notice requirements and failing to obtain ballot affirmation; (2) [t]he [District] violated the District Act by not basing the groundwater charge on the costs of service in accordance with [section] 26.3. As a result, the Plaintiff was overcharged because of, inter alia, subsidies made for treated water, over-budgeting for employees, cost of equipment and water contract purchases; and, (3) the [District] abused its discretion under the District Act when it improperly used groundwater revenue for activities not within the scope of [s]ection 26.3 of the District Act and when it commingled groundwater revenues with other monies." The court declined to issue an injunction or writ of mandate. It reserved the issues of costs and attorney fees.¹¹

11 The trial court subsequently denied Great Oaks's motion for reasonable attorney fees under Code of Civil Procedure section 1021.5. Great Oaks separately appealed from that order in Great Oaks Water Company v. Santa Clara Valley Water District (Aug. 12, 2015, H035885) [nonpub. opn.] (H035885). While this case and case No. H035885 were pending before this court, we denied a motion to consolidate them. In case No. H035885, we affirmed the order denying attorney fees. Great Oaks did not file a petition for review in that case.

The District filed a timely notice of appeal.

II

Discussion

A. The Groundwater Charges at Issue are Not Subject to Article XIII D

1. The Supreme Court's Decision in San Buenaventura

In San Buenaventura, the California Supreme Court framed the "threshold question" as "whether the [groundwater] pumping charges [at issue were] 'imposed . . . upon a parcel or upon a person as an incident of property ownership' within the meaning of article XIII D. (Cal. Const., art. XIII D, § 2, subd. (e).)" (San Buenaventura, supra, 3 Cal.5th at pp. 1202-1203.) The decision provided an overview of the constitutional limitations on governmental authority to collect revenue through taxes, fees, charges, and other levies or exactions.

"Passed in 1978, the purpose of [Proposition 13 (art. XIII A)] 'was to assure effective real property tax relief by means of an "interlocking 'package' " consisting of a real property tax rate limitation (art. XIII A, § 1), a real property assessment limitation (art. XIII A, § 2), a restriction on state taxes (art. XIII A, § 3), and a restriction on local taxes (art. XIII A, § 4).' [Citation.] The ' "principal provisions" ' of the initiative ' "limited ad valorem property taxes to 1 percent of a property's assessed valuation and limited increases in the assessed valuation to 2 percent per year unless and until the property changed hands. (Cal. Const., art. XIII A, §§ 1, 2.)" ' [Citation.] ' "To prevent local governments from subverting its limitations, Proposition 13 also prohibited counties, cities, and special districts from enacting any special tax without a two-thirds vote of the electorate. [Citations.]" ' [Citation.]" (San Buenaventura, supra, 3 Cal.5th at p. 1199.)

"[A]rticle XIII A . . . did not restrict local governments' ability to impose 'legitimate special assessments'—that is, charges levied on owners of real property directly benefited by a local improvement to defray its costs. [Citation.] In part to close this perceived loophole, voters in 1996 passed Proposition 218, which, among other things, ' "buttresse[d] Proposition 13's limitations on ad valorem property taxes and special taxes by placing analogous restrictions on assessments, fees, and charges." ' [Citation.] Article XIII D, added by Proposition 218, imposes certain substantive and procedural restrictions on taxes, assessments, fees, and charges 'assessed by any agency upon any parcel of property or upon any person as an incident of property ownership.' (Cal. Const., art. XIII D, § 3, subd. (a).) Among other things, article XIII D instructs that the amount of a 'fee or charge imposed upon any parcel or person as an incident of property ownership shall not exceed the proportional cost of the service attributable to the parcel.' (Id., § 6, subd. (b)(3).)" (San Buenaventura, supra, 3 Cal.5th at pp. 1199-1200, italics added.)

"[A]rticle XIII D ' "allows only four types of local property taxes: (1) an ad valorem property tax; (2) a special tax; (3) an assessment; and (4) a fee or charge," ' and places certain restrictions on each kind of exaction. [Citation.] The provisions governing fees and charges command that no fee or charge 'shall be assessed . . . upon any parcel of property or upon any person as an incident of property ownership' except '[f]ees or charges for property related services' that satisfy the requirements of article XIII D. (Cal. Const., art. XIII D, § 3, subd. (a)(4).) Article XIII D defines ' "fee" or "charge" ' to mean 'any levy other than an ad valorem tax, a special tax, or an assessment, imposed by an agency upon a parcel or upon a person as an incident of property ownership, including a user fee or charge for a property related service.' (Id., § 2, subd. (e).) A ' "property-related service," ' in turn, is defined as a 'public service having a direct relationship to property ownership.' (Id., § 2, subd. (h).)" (San Buenaventura, supra, 3 Cal.5th at p. 1203, fn. omitted.)

"A '[p]roperty [r]elated' fee or charge within the meaning of these provisions is subject to several procedural requirements. (Cal. Const., art. XIII D, § 6.) Among other things, an agency that proposes to impose such a fee or charge must notify 'the record owner of each identified parcel upon which the fee or charge is proposed for imposition' and conduct a public hearing on the proposal. (Id., § 6, subd. (a)(1); see id., § 6, subd. (a)(2).) 'If written protests against the proposed fee or charge are presented by a majority of owners of the identified parcels, the agency shall not impose the fee or charge.' (Id., § 6, subd. (a)(2).) 'Except for fees or charges for sewer, water, and refuse collection services, no property related fee or charge' may be 'imposed or increased' unless it is 'approved by a majority vote of the property owners of the property subject to the fee or charge or, at the option of the agency, by a two-thirds vote of the electorate residing in the affected area.' (Id., § 6, subd. (c).)" (San Buenaventura, supra, 3 Cal.5th at p. 1203.)

"A covered fee or charge is also subject to a series of substantive limitations. The revenues derived from the fee or charge may not exceed the funds required to provide the property-related service, nor may they be used for any purpose other than that for which the fee or charge was imposed. (Cal. Const., art. XIII D, § 6, subd. (b)(1) & (2).) And in a provision central to the [City of San Buenaventura's] challenge . . . , article XIII D provides that the amount of the charge may not 'exceed the proportional cost of the service attributable to the parcel.' (Id., § 6, subd. (b)(3).)" (San Buenaventura, supra, 3 Cal.5th at p. 1204.)

"Whether an exaction is a property-related charge for purposes of article XIII D 'is a question of law for the appellate courts to decide on independent review of the facts.' [Citation.]" (San Buenaventura, supra, 3 Cal.5th at p. 1204.) Courts "construe the provisions of article XIII D liberally, ' "to effectuate its purposes of limiting local government revenue and enhancing taxpayer consent." ' [Citation.]" (Ibid.) "The relevant government agency . . . bears the burden of demonstrating compliance. (Cal. Const., art. XIII D, § 6, subd. (b)(5).)" (Ibid.)

"Proposition 218 also added article XIII C, which restricts the authority of local governments to impose taxes by, among other things, requiring voter approval of all taxes imposed by local governments." (San Buenaventura, supra, 3 Cal.5th at p. 1200, fn. omitted.) Article XIII C, section 2, subdivision (d), provides in part: "No local government may impose, extend, or increase any special tax unless and until that tax is submitted to the electorate and approved by a two-thirds vote."¹² "Special tax" is defined to mean "any tax imposed for specific purposes, including a tax imposed for specific purposes, which is placed into a general fund." (Art. XIII C, § 1, subd. (d).)

12 Article XIII C's definition of "local government" includes "special districts" (art. XIII C, § 1, subd. (b)), and a "special district" is further defined as "an agency of the State, formed pursuant to general law or a special act, for the local performance of governmental or proprietary functions with limited geographic boundaries including, but not limited to, school districts and redevelopment agencies." (Id., subd. (c).)

"In 2010, voters passed Proposition 26, which further expanded the reach of article XIII C's voter approval requirement by broadening the definition of ' "tax" ' to include 'any levy, charge, or exaction of any kind imposed by a local government.' (Cal. Const., art. XIII C, § 1, subd. (e).) The definition contains numerous exceptions for certain types of exactions, including for 'property-related fees imposed in accordance with the provisions of Article XIII D' (id., § 1, subd. (e)(7)), as well as for charges for 'a specific benefit conferred or privilege granted,' or 'a specific government service or product' that is provided, 'directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government' (id., § 1, subd. (e)(1) & (2)). To fall within one of these exemptions, the amount of the charge may be 'no more than necessary to cover the reasonable costs of the governmental activity,' and 'the manner in which those costs are allocated to a payor' must 'bear a fair or reasonable relationship to the payor's burdens on, or benefits received from, the governmental activity.' (Id., §1, subd. (e).)" (San Buenaventura, supra, 3 Cal.5th at p. 1200.)

In San Buenaventura, the California Supreme Court concluded that "the groundwater charge authorized by Water Code section 75522 is not a charge for a 'property-related service' that falls within the scope of Proposition 218."¹³ (San Buenaventura, supra, 3 Cal.5th p. 1209, fn. omitted.) The court pointed out: "The District does not 'deliver' water 'via groundwater' to any particular parcel or set of parcels, as the City would characterize it. The District instead conserves and replenishes groundwater that flows through an interconnected series of underground basins, none of which corresponds with parcel boundaries. These basins are managed by the District for the benefit of the public that relies on groundwater supplies, not merely for the benefit of the owners of land on which wells are located. (See Wat. Code, §§ 75521, 75522.) And [those] two groups [were] not one and the same; while some well operators extract[ed] water for use on their own property, others, such as the City, extract[ed] water for sale and distribution elsewhere. (Cf. City of Barstow v. Mojave Water Agency (2000) 23 Cal.4th 1224, 1240-1241 [contrasting overlying with appropriative water rights].)" (Id. at p. 1208.)

13 Water Code section 75522 provides: "The ground water charges are authorized to be levied upon the production of ground water from all water-producing facilities, whether public or private, within the district or a zone or zones thereof for the benefit of all who rely directly or indirectly upon the ground water supplies of the district or a zone or zones thereof and water imported into the district or a zone or zones thereof."

The court reasoned: "The text of article XIII D provides important indications about what sort of service-related charges the voters had in mind. Article XIII D, section 6 tells us, for example, that revenues derived from the fee may not 'exceed the funds required to provide the property related service' (subd. (b)(1)); that the amount imposed on any parcel may not 'exceed the proportional cost of the service attributable to the parcel' (subd. (b)(3)); and that property owners may not be charged for 'potential or future use of a service' (subd. (b)(4)) or for 'general governmental services' (subd. (b)(5)). The lesson that emerges from the text and cases is this: A fee is charged for a 'property-related service,' and is thus subject to article XIII D, if it is imposed on a property owner, in his or her capacity as a property owner, to pay for the costs of providing a service to a parcel of property." (San Buenaventura, supra, 3 Cal.5th at pp. 1207-1208.)

The Supreme Court determined that "the District's services, by their nature, are not directed at any particular parcel or set of parcels in the same manner as, for example, water delivery or refuse collection services. (Richmond [v. Shasta Community Services Dist. (2004)] 32 Cal.4th [409,] 426, citing Ballot Pamp., Gen. Elec. (Nov. 5, 1996), analysis of Prop. 218 by Legis. Analyst, p. 73.)" (San Buenaventura, supra, 3 Cal.5th at p. 1208.) It stated, "Put differently, when the District fulfills its statutory functions it is not providing a service to the City in its capacity as the owner of the lands on which its wells are located, but in the City's capacity as an extractor of groundwater from stores that are managed for the benefit of the public." (Ibid.)

Further, since the Supreme Court "disagree[d] with the trial court that the fee at issue [was] a property-related fee within the meaning of article XIII D [of the California Constitution], [it further] conclude[d] that the fee [was] not subject to that provision's proportionality requirement." (San Buenaventura, supra, 3 Cal.5th at p. 1209, fn. 6.) The Supreme Court disapproved two decisions of this court, Amrhein, supra, 150 Cal.App.4th 1364 and Griffith v. Pajaro Valley Water Management Agency (2013) 220 Cal.App.4th 586 (Griffith), "insofar as they [were] inconsistent with [the court's] opinion." (San Buenaventura, supra, at p. 1209, fn. 6.)

In San Buenaventura, the California Supreme Court separately concluded that "article XIII C, as amended by Proposition 26, rather than article XIII D, supplie[d] the proper framework for evaluating the constitutionality of the groundwater pumping charges at issue in [that] case."¹⁴ (San Buenaventura, supra, 3 Cal.5th at p. 1198.) The court explained that "because the Court of Appeal [in San Buenaventura] did not address the City's argument that the charges [did] not bear a fair or reasonable relationship to the payor's burdens on or benefits from the District's conservation activities, as article XIII C require[d], [it was] . . . remand[ing] for consideration of that question." (Ibid.)

14 As amended by Proposition 26, article XIII C states: "The local government bears the burden of proving by a preponderance of the evidence that a levy, charge, or other exaction is not a tax, that the amount is no more than necessary to cover the reasonable costs of the governmental activity, and that the manner in which those costs are allocated to a payor bear a fair or reasonable relationship to the payor's burdens on, or benefits received from, the governmental activity." (Art. XIII C, § 1, subd. (e).)

2. District's Groundwater Charges Are Not Within the Scope of Article XIII D

The district in San Buenaventura was "a water conservation district formed under the Water Conservation District Law of 1931 (Wat. Code, § 74000 et seq.), to ' "manage, protect, conserve and enhance the water resources of the Santa Clara River, its tributaries and associated aquifers, in the most cost effective and environmentally balanced manner." ' " (San Buenaventura, supra, 3 Cal.5th at p. 1198.) As noted by the Supreme Court, "[t]he Water Code authorizes water conservation districts to finance their activities by imposing a 'ground water charge[ ]' on 'the production of ground water from all water-producing facilities' within the district (or within certain zones in the district). (Wat. Code, § 75522.)" (Id. at pp. 1198-1199, fn. omitted.) "Under the code, a district may establish different zones for rate-setting purposes. (Id., § 75591.) Within each zone, the district must charge a uniform rate for all water pumped for agricultural use, and a uniform rate for all water pumped for nonagricultural use. (Id., §§ 75591, 75593.) Subject to an exception not relevant [in San Buenaventura] (id., § 75595), the rate for nonagricultural use must be between three and five times the rate for agricultural use. (Id., § 75594.)" (Id. at p. 1199.)

The District argues that the holding of San Buenaventura "controls the outcome of Great Oaks' claims under article XIII D" because the groundwater pumping charges at issue in that case and the groundwater charges levied by the District in this case are "functionally indistinguishable." The District points to section 26 of the District Act, which provides that the District's board of directors "shall have the power, in addition to the powers enumerated elsewhere in this act, to levy and collect a ground water charge for the production of water from the ground water supplies within a zone or zones of the district which will benefit from the charge of underground water supplies or the distribution of imported water in such zone or zones." This language is very similar to the language of Water Code section 75522. (See ante, fn. 13.) The District maintains that article XIII D does not apply to the groundwater charges at issue in this case, the trial court erred in determining that those charges violated article XIII D, and this court should reverse the judgment and direct the trial court to enter judgment in its favor.

In its supplemental brief, Great Oaks attempts to distinguish this case from San Buenaventura, suggesting that "the statutory authorities for levying and collecting the respective groundwater charges [were] not the same" and that the districts' statutory purposes, their "respective ground water charges," and the ways in which each district could spend its groundwater revenue were not the same. Great Oaks asserts that the district in this case is a flood control and water district, whereas the district in San Buenaventura was a water conservation district. But Great Oaks concedes, as it must, that "both cases involve groundwater charges imposed by a governmental agency upon those producing (pumping) groundwater from the underground basins within the jurisdiction of the government agency."

Despite some differences, there are decisive similarities in the law. The broad purposes of the groundwater charges in San Buenaventura and those challenged in this case were substantially the same. (Compare Wat. Code, § 75521 ["Ground water charges levied pursuant to this part are . . . in furtherance of district activities in the protection and augmentation of the water supplies for users within the district or a zone or zones thereof which are necessary for the public health, welfare, and safety of the people of this state"] with § 26.3 ["Ground water charges levied pursuant to this act are declared to be in furtherance of district activities in the protection and augmentation of the water supplies for users within a zone or zones of the district which are necessary for the public health, welfare and safety of the people of this State"].) Most significantly, the groundwater charges were levied and assessed against persons operating groundwater-producing facilities under the governing law in both San Buenaventura and this case. (Compare Wat. Code, § 75591 ["If the board determines that a zone or zones should be established and a ground water charge levied therein, it shall establish the zone or zones and levy, assess, and affix the charge against all persons operating ground water producing facilities within the zone or zones during the current or ensuing water year"] with § 26.7, subd. (a)(2) ["If the board determines that a groundwater charge should be levied, it shall levy, assess, and affix the charge or charges against all persons operating groundwater-producing facilities within the zone or zones during the ensuing water year"].)

Great Oaks has not offered any cogent reason for not applying the Supreme Court's analysis in San Buenaventura to this case. The Supreme Court in San Buenaventura determined that the groundwater pumping charge was " 'better characterized as a charge on the activity of pumping than a charge imposed by reason of property ownership.' " (San Buenaventura, supra, 3 Cal.5th at p. 1207.) The Supreme Court indicated that a ground water pumping charge is distinct from a fee or charge for water service. " 'A fee for ongoing water service through an existing connection is imposed "as an incident of property ownership" because it requires nothing other than normal ownership and use of property. . . .' [Citation.]" (Id. at p. 1205.) But the Supreme Court concluded that charges for ground water pumping were not "imposed . . . upon a parcel or upon a person as an incident of property ownership" (Art. XIII D, § 2, subd. (e)) within the meaning of article XIII D and therefore those charges fell "outside the reach of article XIII D." (San Buenaventura, supra, 3 Cal.5th at pp. 1202-1203.)

Like the groundwater pumping charges in San Buenaventura, the groundwater charges at issue in this case were imposed on Great Oaks based upon the activity of groundwater production or extraction rather than upon the normal ownership and use of property. Because the groundwater charges in this case were not imposed as an "incident of property ownership," they were not subject to the requirements and restrictions of article XIII D, and the trial court erred in determining otherwise.¹⁵ Given our conclusion, it is unnecessary to decide whether Great Oaks's pre-suit claim submitted to the District preserved a monetary remedy against the District for alleged violations of article XIII D or whether the District complied with the procedural or substantive requirements of article XIII D in levying the groundwater charges at issue.

15 We note the District's contention that the challenged charge is, at least in part, a capacity charge, and thus subject to the Mitigation Fee Act. (See Gov. Code, §§ 66000.5, subd. (a); 66013, subd. (b)(3) [definition of "capacity charge"].) If accepted, the proposition would bar any challenge to the groundwater charges—or at least to the portion constituting a capacity charge—pursuant to former Government Code section 66022, which provided that any judicial challenge to a capacity charge must be filed within 120 days after the charge is adopted. (See Stats.1990, ch. 1572, § 22, pp. 7505-7506.) The trial court appears not to have specifically addressed this question, which the District raised in Phase II, but which Great Oaks argued -- and continues to argue -- was forfeited by the District's failure to raise it in Phase I. In light of our conclusions, it is unnecessary for us to reach the issue.

Unlike the situation in San Buenaventura, Great Oaks did not seek a judicial determination that the challenged groundwater charges were special taxes subject to the requirements of article XIII C. (Cf. San Buenaventura, supra, 3 Cal.5th at p. 1201 [city contended that groundwater pumping charges "violate[d] either article XIII D or, in the alternative, article XIII C of the California Constitution"].) In this case the parties by agreement narrowed the issues to be decided. Great Oaks has not shown that it preserved an alternative constitutional claim that, if the District's groundwater charges were not within the scope of article XIII D, they were taxes subject to the constraints of article XIII C.¹⁶ Neither has it squarely raised the issue on appeal. (See Panopulos v. Maderis (1956) 47 Cal.2d 337, 340-341 [As a general rule, "a party to an action may not, for the first time on appeal, change the theory of the cause of action. [Citations.]"]; Ernst v. Searle (1933) 218 Cal. 233, 240-241 [in general, permitting a party to "adopt a new and different theory on appeal" "would not only be unfair to the trial court, but manifestly unjust to the opposing litigant"].) B. District Act

16 Great Oak's trial brief mentioned article XIII C only passingly. Although Great Oaks broadly asserted that "Proposition 218 took the power to levy charges away from SCVWD and its board and transferred it to the voters" and that the District had been in violation of Proposition 218 since its effective date because "[v]oter approval is now and has been required since July 1, 1997 for the groundwater charge . . . ", its specific constitutional arguments focused exclusively on article XIII D, arguing that the groundwater charge was imposed as an incident of property ownership.

1. Introduction

As noted above, the only objection originally asserted by Great Oaks was that the District had violated the District Act by spending groundwater charge revenue for unauthorized purposes and overcharging groundwater extractors to cover those expenditures. This theory was pursued through trial on the basis of multiple subsidiary allegations, most of which the trial court found were "not supported by the evidence." The court was convinced, however, that "the District abused its discretion, and violated [s]ection 26.3 of the District Act, when fixing the Plaintiff's groundwater charges," in that the charges were not based upon cost of service, and that a "disparity" existed "between actual cost of benefits conferred on Great Oaks and the charges imposed" on it. It cited expert testimony as well as an April 2000 independent audit report, "which indicated that the 'District's cost of service calculations may no longer be valid especially with respect to servicing North vs. South County[,] . . . the revenue recovered from one or more of the District's customer classes may be subsidizing those from other classes . . .^['^] [and] the District should review its agricultural water pricing practice for adequacy and fairness.' " The court noted that the District "did not change its policy" despite this report.

The trial court also found that the District had abused its discretion "with regard[] to spending." Specifically, it determined that the District (1) "improperly used groundwater revenue for activities not within the scope of [s]ection 26.3 of the [District] Act"; (2) "unwisely commingled groundwater revenue with other monies"; and (3) overcharged Great Oaks by (a) overbudgeting for "employees, cost of equipment and water contract purchases," (b) "placing the excess money in its reserve fund," and (c) failing to credit these surpluses back to Great Oaks "when appropriate."

2. Standard and Scope of Review

a. Background

In its Phase I trial brief the District argued that the court was obligated to apply a highly deferential standard of review to Great Oaks's claims that the District had violated the District Act in fixing the groundwater charge and spending the proceeds. It contended that these actions could be overturned only if Great Oaks demonstrated that they were "so palpably unreasonable and arbitrary as to indicate that [the District] abused its discretion as a matter of law." It asserted that the matter was governed by the principles applicable to "judicial review of a legislative or quasi-legislative action," which is to be conducted "under ordinary mandamus, and . . . limite[d to] an examination of the proceeding to determine whether the agency's action was arbitrary, capricious, or entirely lacking in evidentiary support, or whether the agency has failed to give the notices and follow the procedures required by law." In addition, the District asserted, Great Oaks "ha[d] the burden to show that no substantial evidence supported the District's determination of the groundwater rates."

In its reply to the District's trial brief, Great Oaks failed to meet these assertions squarely. Rather, in a section of the brief purporting to address the applicable standard of review, it asserted that under the authority of Silicon Valley Taxpayers' Assn., Inc. v. Santa Clara County Open Space Authority (2008) 44 Cal.4th 431, which applied article XIII D, courts are to exercise their independent judgment on the question "whether assessments, fees and charges are proportional to the benefits received by those paying the assessment, fee or charge." It then offered this sentence: "Because the groundwater charge involves Proposition 218 application, neither the substantial evidence test nor the arbitrary and capricious test applies in determining whether the District has complied with its Act." It completed its evasion of the issue by observing that matters of statutory construction raise only questions of law, followed by a recitation of rules of statutory construction.

The trial court gave no indication of the standard of review it applied to the District Act claims other than to declare that the District had abused its discretion in fixing the groundwater charges at issue and in spending the revenues received from them. b. Rule of Decision in Trial Court

The District was quite correct to tell the trial court that the District Act claims were challenges to quasi-legislative acts and, as such, should be evaluated under the "arbitrary and capricious" standard of review. An administrative agency's decision to impose a fee, charge, or other exaction is a quasi-legislative act. (See Home Builders Assn. of Tulare/Kings Counties, Inc. v. City of Lemoore (2010) 185 Cal.App.4th 554, 561 [city's adoption of development impact fees was quasi-legislative act]; Shapell Industries, Inc. v. Governing Board (1991) 1 Cal.App.4th 218, 230-231 (Shapell Industries) [same, school district's adoption of facilities fee]; Balch Enterprises, Inc. v. New Haven Unified School Dist. (1990) 219 Cal.App.3d 783, 791 (Balch Enterprises) [same]; Carlton Santee Corp. v. Padre Dam Mun. Water Dist. (1981) 120 Cal.App.3d 14 [rules and rates for water and sewer service]; Kahn v. East Bay Mun. Util. Dist. (1974) 41 Cal.App.3d 397, 409, quoting City Council v. Superior Court (1960) 179 Cal.App.2d 389, 393 [" 'The fixing or refixing of rates for a public service is legislative, or at least quasi legislative' "].)

An agency also exercises quasi-legislative power when it decides how to manage and spend the funds under its control. (See California Assn. of Professional Scientists v. Department of Finance (2011) 195 Cal.App.4th 1228, 1232, quoting Tirapelle v. Davis (1993) 20 Cal.App.4th 1317, 1323 [state personnel department's authority to set salaries described as " 'quasi-legislative' "]; SN Sands Corp. v. City and County of San Francisco (2008) 167 Cal.App.4th 185, 191 [agency's award of contract, and acts leading up to it, are quasi-legislative]; Carmel Valley Fire Protection Dist. v. State of California (2001) 25 Cal.4th 287, 302 [challenged budget measures were "an expression of the Legislature's essential duty to devise a reasonable budget"]; Scott v. Common Council (1996) 44 Cal.App.4th 684, 688 [trial court's order invalidating city council's elimination of funding for city attorney's investigators raised "the question of the power of the trial court to interfere with the legislative process of adopting a budget"]; Association for Retarded Citizens v. Department of Developmental Services (1985) 38 Cal.3d 384, 390-391 [applying standard of review for quasi-legislative action to spending directives issued by department director; holding them void as beyond statutory authority]; American Canyon Fire Protection Dist. v. County of Napa (1983) 141 Cal.App.3d 100, 106 [distribution of funds by county board was quasi-legislative]; Board of Supervisors v. California Highway Commission (1976) 57 Cal.App.3d 952, 960 [in determining when highway project should be "funded and constructed," highway commission "acted as a legislative body, exercising quasi-legislative powers"].)

The quasi-legislative actions of administrative agencies are generally reviewed by a proceeding in ordinary mandate, in which judicial review is constrained by several principles. Foremost of these is that the judicial inquiry is generally " ' "confined to the question whether the classification is 'arbitrary, capricious, or [without] reasonable or rational basis.' [Citations.]" ' [Citation.]" (American Coatings Assn. v. South Coast Air Quality Management Dist. (2012) 54 Cal.4th 446, 460 (American Coatings).) Where administrative proceedings are quasi-legislative in nature, "courts exercise limited review out of deference to separation of powers between the Legislature and the judiciary, and to the presumed expertise of the agency within the scope of its authority." (Western Oil & Gas Assn. v. Air Resources Board (1984) 37 Cal.3d 502, 509.) A reviewing court will also "determine whether the agency acted within the scope of its delegated authority." (Ibid.)

As noted above, the District duly invoked a deferential standard of review in its trial brief, while Great Oaks evaded the issue. On appeal, Great Oaks contends that this standard does not apply here because "this is not a review of a proceeding in mandamus, but is instead the review of the trial court's decisions on issues and procedures agreed and consented to by the District." This highly ambiguous statement suggests two possible grounds for holding the above standard of review inapplicable: first, that the trial court did not grant relief in mandamus—in fact it expressly denied such relief—and second, that the parties' agreed method of trying the case excused the court from applying this standard of review. Neither premise is sound.

It is true that the District stipulated to certain procedures that appear unusual in a proceeding of this kind. But we see no indication that it waived the deferential standards ordinarily limiting judicial review of quasi-legislative actions. Nor is there any sign that the court believed the principles governing review by mandate were wholly inapplicable. The court apparently accepted as a rule of decision that the District could be liable only if found to have abused its discretion; to that extent the court's statement of decision echoes the general principles governing proceedings in mandate. (See American Coatings, supra, 54 Cal.4th at p. 460.) As far as we can tell, the court simply overlooked the more stringent test applied in the present context to determine whether an abuse of discretion occurred.

Nor does the court's denial of relief in mandate exempt this action from these limitations on judicial review. In the first place, the court's decision not to grant writ relief seems to rest on the premise that as framed by Great Oaks, the prayer for such relief was moot. In its cause of action for writ of mandate, Great Oaks alleged that the District had "abused its discretion" in five particulars and prayed for a writ directing the District to take or refrain from six specified actions.¹⁷ The court explained its denial of writ relief by stating that "the illegal fee collection activity . . . has already occurred." The court apparently viewed the writ as appropriate only for prospective relief. In this regard the court appeared to equate writ relief with injunctive relief--which it also denied, at the same time and on the same grounds.

17 Great Oaks prayed that the District be directed to (a) "limit future assessment of groundwater charges against Plaintiff to only the amount necessary to fund the specific purposes authorized by the [District] Act," (b) "limit spending of groundwater charge monies to the purposes set forth in [section] 26.3 of the Act," (c) "acknowledge that the setting of groundwater charge rates to encourage the purchase of treated water is a violation of [section] 26.3 of the Act," (d) "not use groundwater charges to provide treated surface water; alternately, . . . to revise the Groundwater Charge zones to reflect the specific purposes of [s]ection 26.3 of the Act, including but not limited to the distinction between [those] who benefit and those who do not benefit from treated surface water," (e) "collect groundwater charges and fines from all persons producing groundwater in strict accordance with the Act," and (f) "obtain a favorable vote of zone residents before increasing groundwater charges."

The court may also have concluded that writ relief was inappropriate because an adequate remedy at law existed in a simple award of damages. (See Code Civ. Proc., § 1086 ["The writ must be issued in all cases where there is not a plain, speedy, and adequate remedy, in the ordinary course of law"].) In fact, however, no legal basis for such an award has ever been identified. Apparently, it never occurred to the parties or the court to inquire into the availability of a simple money judgment against the District based upon claimed violations of the Act. Yet when it comes to awarding damages against public entities, sovereign immunity is the rule and liability is the exception. (See In re Groundwater Cases (2007) 154 Cal.App.4th 659, 688 [Public entity defendants could be held liable for alleged violations of water safety standards "only if there is a statute subjecting them to civil liability. [Citation.] In the absence of such a statute, . . . sovereign immunity bars the suit."]; ibid., quoting Legis. Com. com., 32 West's Ann. Gov. Code (1995 ed.) foll. § 815, p. 167 ["Government Code section 815 . . . 'abolishes all common law or judicially declared forms of liability for public entities, except for such liability as may be required by the state or federal constitution' "].)

Although the parties have described this action at various times as an action for a refund, they have never offered statutory or other authority for entering a money judgment in such an action. In such circumstances, the appropriate remedy, if warranted, appears to be a writ of mandate directing the District to refund all or part of the charges paid, and the action is governed by the standards of review described above. (See Balch Enterprises, supra, 219 Cal.App.3d at p. 791 [action for refund of school facility fees, "[a]s an action challenging a quasi-legislative action," was "one of ordinary mandamus . . . governed by more limited standards of review"]; Shapell Industries, supra, 1 Cal.App.4th at p. 225 [affirming issuance of mandate directing refund of school facility fee]; Warmington Old Town Associates v. Tustin Unified School Dist. (2002) 101 Cal.App.4th 840, 867 [same]; Frost v. Trustees of Cal. State University and Colleges (1975) 46 Cal.App.3d 225, 228 ["Mandamus is the proper remedy to compel the Trustees of the California State University and Colleges to pay back salary wrongfully withheld from a state university academic employee"]; Western/California, Ltd. v. Dry Creek Joint Elementary School Dist. (1996) 50 Cal.App.4th 1461, 1467-1469, 1473, 1492 [reversing, on substantive grounds, writ directing refund of facility fee]; cf. Schoderbek v. Carlson (1980) 113 Cal.App.3d 1029, 1037 [mandate not available to secure refund of property taxes where statutory action for refund supplied adequate remedy at law], disapproved on another point in Woosley v. State of California (1992) 3 Cal.4th 758, 792.)

Thus, while the trial court apparently denied writ relief in favor of a monetary judgment, it appears that the judgment can be upheld only if viewed as a grant of writ relief directing payment of money. We reject Great Oaks's contention that we are not "review[ing] . . . a proceeding in mandamus" because in substance that is exactly what we are doing.

Finally, and most fundamentally, the standard of review in an action seeking to overturn the quasi-legislative acts of an administrative agency does not depend on the form in which the challenge is framed, or on the nature of the relief prayed for. In Lewin v. St. Joseph Hospital of Orange (1978) 82 Cal.App.3d 368 (Lewin), a doctor argued that a decision to exclude him from a hospital staff must be reviewed under the more searching standards governing administrative mandate (see Code Civ. Proc., § 1094.5) because it amounted to an adjudication of his rights. The court rejected this contention because the decision rested on a policy decision by the hospital to maintain a closed staff. " 'Generally speaking, a legislative action is the formulation of a rule to be applied to all future cases, while an adjudicatory act involves the actual application of such a rule to a specific set of existing facts.' [Citations.] . . . What was involved was the formulation, or to be more precise, the retention of a rule of general application, not the application of a rule to a specific set of facts or a particular individual. [¶] . . . [W]e are confident the limited judicial review applicable to the quasi-legislative actions of a governmental administrative agency is also appropriately applied to judicial review of rule-making or policy-making actions of a nonprofit hospital corporation." (Lewin, supra, 82 at pp. 383-384; see id. at p. 385 [citing Ascherman v. Saint Francis Memorial Hosp. (1975) 45 Cal.App.3d 507, 511-512 and noting that restrictive scope of review in the case "was in no way based on mandate considerations"].)

In other words, here as in so much of the law, substance must prevail over form. This is necessary to effectuate the fundamental policy concerns—in part, structural constitutional concerns—restricting judicial review of quasi-legislative actions. "The courts exercise limited review of legislative acts by administrative bodies out of deference to the separation of powers between the Legislature and the judiciary, to the legislative delegation of administrative authority to the agency, and to the presumed expertise of the agency within its scope of authority." (California Hotel & Motel Assn. v. Industrial Welfare Com. (1979) 25 Cal.3d 200, 211-212, fn. omitted; see Shapell Industries, supra, 1 Cal.App.4th at p. 230; Western States Petroleum Assn. v. Superior Court (1995) 9 Cal.4th 559, 572 (Western States Petroleum).) Those concerns do not shrink, let alone disappear, simply because a challenge takes a form other than a petition for mandate. Here the Legislature has delegated to the District the authority to fix a groundwater extraction charge according to specified criteria, and to spend the proceeds of that charge within given guidelines. For a court to simply substitute its own judgment for the judgment of the body thus charged with legislative power would violate the separation of powers and infringe upon the Legislature's prerogative to delegate its authority to duly constituted administrative entities.

We conclude that the question whether the charge complies with the District Act should have been determined in accordance with the restrictive principles generally governing judicial review of quasi-legislative action. c. Extrinsic Evidence

Although we see no sign that the District forfeited the restrictive standard of review described above, the same cannot be said for the principle, first cited in its opening brief here, that judicial review of quasi-legislative acts "is ordinarily limited to the administrative record." (See American Coatings, supra, 54 Cal.4th at p. 460.) The District's failure to invoke this principle in the trial court, its active participation in the rule's wholesale disregard, and its failure to produce or identify an administrative record, preclude application of this rule at this late date.

First, the District has never identified an administrative record to which review should or can be confined. At least some crucial documents that apparently led up to the adoption of the 2005-2006 groundwater extraction rates appear to be absent from the appellate record. In addition, an administrative record would ordinarily include some record of the hearings leading up to the adoption of the challenged rates and any objections or other submissions placed before the District in connection with those hearings. We see no such materials in the record.

Since the administrative record is an unknown quantity, and the rule confining review to that record seems never to have been pressed upon the trial court, it is impossible to say that the trial court erred by failing to limit review to such a record. Further, any error in this regard was clearly invited by both parties when they joined in stipulating, prior to the commencement of Phase I of trial, to the admission of "the declarations, deposition testimony and exhibits" accompanying their respective trial briefs as well as to additional declarations to be submitted by both parties, with each reserving the right to cross-examine the other's declarants. Both parties offered numerous exhibits. They also called live witnesses at the Phase I trial, with neither side objecting to this procedure. At the conclusion of the Phase I trial, the attorneys stipulated in open court that all exhibits that had been marked for identification (except defense exhibit 178) were admissible, and the court admitted them into evidence. This appeal involves a 55-volume appendix.

The District thus actively participated in trying this case entirely free of the rule it now seeks to invoke on appeal. Under the circumstances we must conclude that to the extent the trial court's admission of such evidence was error, it was invited. (See Norgart v. Upjohn Co. (1999) 21 Cal.4th 383, 403 [doctrine of invited error rests on the principle that " '[w]here a party by his conduct induces the commission of error, he is estopped from asserting it as a ground for reversal' on appeal"].)

However, the fact that the court cannot be faulted for admitting this evidence does not mean that it was free to depart from all constraints on judicial review of quasi-legislative actions. Regardless of the evidence before it, "[a] court reviewing a quasi-legislative act cannot reweigh the evidence or substitute its own judgment for that of the agency." (Plastic Pipe & Fittings Assn. v. California Building Standards Com. (2004) 124 Cal.App.4th 1390, 1406.) Even when extra-record evidence has been received, "the determination whether the decision was arbitrary, capricious or entirely lacking in evidentiary support must be based on the 'evidence' considered by the administrative agency." (Lewin, supra, 82 Cal.App.3d 368, 387, fn. 13, citing Brock v. Superior Court (1952) 109 Cal.App.2d 594, 607, 608.) " 'If courts were to independently weigh conflicting evidence in order to determine which side had a preponderance of the evidence, this would indeed usurp the agency's authority and violate the doctrine of separation of powers.' " (See Western States Petroleum, supra, 9 Cal.4th at p. 576.)

Certainly, the District's actions could not be invalidated based solely or primarily on the basis that expert witnesses, testifying after the fact, expressed disagreement with the District's approach to the issues at hand. The Supreme Court has indicated that while courts may admit evidence to establish that an agency had " 'adequately considered all relevant factors,' " they cannot allow the issue to become "whether the decision was wise or scientifically sound in light of the extra-record evidence" because "such questions are not for the courts to answer." (Western States Petroleum, supra, 9 Cal.4th at p. 577.) Here, given the parties' mutual agreement to try the matter in an unorthodox manner, the testimony of such witnesses might reasonably be consulted on matters such as industry practice or applicable accounting concepts. But testimony merely taking issue with the suitability of the District's methodology could not sustain a determination that the District's actions were arbitrary, capricious, or entirely unsupported by evidence.

3. Analysis

a. Alleged Miscalculation of Groundwater Charges

The trial court first found that the District had "abused its discretion[] and violated [s]ection 26.3 of the District Act, when fixing the Plaintiff's groundwater charges." Its ensuing discussion of the evidence suggests that the abuse of discretion consisted of (1) failing to "levy charges based on a cost of service analysis" and (2) relying on a "determination of the cost of benefits to Great Oaks" that was "excessive." These subsidiary findings were expressed somewhat obliquely, by attribution to Thomas O'Rourke, a forensic accountant called by Great Oaks, whose opinions the court apparently meant to adopt, in part, as its own. This is an unfortunate mode of proceeding, particularly because the tenor of the findings thus adopted is not entirely clear. The court explicitly rejected the O'Rourke testimony insofar as it rested on the testimony of another Great Oaks expert, James Ulrick, who had testified in essence that due to hydrological barriers between some District projects and the wells operated by Great Oaks, the costs of those projects could not properly be assessed to Great Oaks. In rejecting that opinion, the court also rejected the O'Rourke testimony depending on it. The court presumably made some effort to quantify the effects of this partial rejection before it awarded "damages" to Great Oaks. Its methodology in doing so, however, is not apparent.

Further, we detect considerable tension between O'Rourke's assertions, both impliedly accepted by the trial court, that the District "did not levy charges based on a cost of service analysis" and that "the determination of cost of benefits to Great Oaks was excessive." The first statement seems to posit that the District was required to but entirely failed to take costs of service into account in fixing the groundwater charge. The second statement posits that the District had in fact "determin[ed] . . . the cost of benefits to Great Oaks" but had overstated them.

O'Rourke appeared to suggest on the one hand that the District had wholly failed to base the groundwater charge on an assessment of costs, declaring that it "does not levy its groundwater charges in accordance with any cost-of-service analysis," and that it had failed to comply with "standard accounting and costing principals [sic]," which "call for a fair matching of revenue and expenses for measuring performance or pricing with the service activities of the governmental unit." It elsewhere appeared, however, that his primary criticism was the District's asserted failure to properly define the costs it sought to pay for through the charge. The "underlying assumption" of the District's policies, he testified, was that "there will be a general averaging of the cost of water across the entire Water District." In his view, a proper cost-of-service methodology would be based entirely on the cost of directly replacing groundwater: "[Y]ou need to be able to establish a local area cost of providing injection service; in order to establish how much service—how much water is flowing as a replacement of groundwater."

This last quotation seems to reflect a central point of O'Rourke's testimony, which was that the District was violating the District Act by charging groundwater extractors for services other than direct recharge of the groundwater basin. He expressed this opinion most clearly in the following passage of his declaration: "In accordance with [section] 26.3 of the District Act groundwater charges are to be levied and spent to pay for the cost of services that benefit all who rely directly or indirectly on the groundwater supplies of the zone or zones. In other words, the groundwater charges can be levied in order to recoup the [District's] costs in maintaining and recharging the groundwater basins. However, [the District] does not levy its groundwater charges in accordance with any cost-of-service analysis." (Italics added.) He opined that "it would be both customary and appropriate for [the District] to separately account for groundwater charge money so that it is spent only in accordance with the requirements of the District Act." He declared that the District was instead using groundwater revenues to finance "projects" that were "not within the scope of [section] 26.3," including to pay for "any activity of the entire Water Utility Enterprise, even if it does not relate to groundwater supplies." The District, he declared, failed to "separately account for the groundwater charge money so that it is spent only in accordance with the requirements of the District Act." He further stated, "While it [wa]s possible for [the District] to account for revenues and related expenditures, determine cost of service[,] and properly budget its activities and projects to be fully consistent with its duties and obligation under [s]ection 26.3, [the District] does not do so." In contrast to a provision of the Act permitting the use of ad valorem tax revenues to pay general District expenses, he continued, "[s]ection 26.3 . . . does not permit groundwater charge proceeds to be used for such general expenses." He asserted that groundwater charges were also "com[m]ingled in the Water Utility Enterprise Fund and used for non groundwater supply uses," that "groundwater charge proceeds [were] used for Watershed Funds purposes," and that [t]heses [sic] are not purposes covered by [section] 26.3."

Given this pervasive reliance on O'Rourke's interpretation of the District Act, and particularly section 26.3, it is not surprising that in a document entitled "Citation to Evidence," Great Oaks cited O'Rourke as the "Source" for the "Fact" that "[t]o comply with the groundwater provisions of the Act there should be separate accounting to insure groundwater charge funds are only spent on projects authorized under [section] 26.3 of the Act." But the meaning of the District Act is not a "fact" subject to evidentiary proof. It is a pure question of law.

Furthermore, the construction of the District Act is a matter as to which witness O'Rourke was never shown to possess any expertise. He was an accountant, not an attorney, and he gave no testimony of a type that an accountant might give bearing on the meaning of a statute—such as how similar statutes, if any, were understood or applied in contexts with which he was familiar. So far as the record shows, he simply took it upon himself—or had it given to him by Great Oaks—to give an interpretation of section 26.3 and to base much of his own opinion on that interpretation, which in turn furnished a foundation for many if not most of the challenges sustained by the court.

The trial court gave no explanation for its adoption of O'Rourke's interpretation of the District Act in preference to that implicitly adopted and applied by the District. It simply declared itself "convinced" by his testimony. Of course, the meaning and effect of the statute were ultimately questions for the courts, and to that extent the District's interpretation could not bind the trial court. (See Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal.4th 1094, 1105, fn. 7 ["[w]hile the [agency's] construction of a statute is entitled to consideration and respect, it is not binding and it is ultimately for the judiciary to interpret this statute"].) But it was a matter presumptively within the District's competence and expertise, such that the trial court should have accorded it " ' "great weight and respect." ' " (American Coatings, supra, 54 Cal.4th at p. 461, quoting Yamaha Corp. of America v. State Bd. of Equalization (1998) 19 Cal.4th 1, 12.) There is no indication that the court did so.

"The meaning and construction of a statute is a question of law, which [courts] decide independently. (People ex rel. Lockyer v. Shamrock Foods Co. (2000) 24 Cal.4th 415, 432.) We are required to harmonize the various parts of a statutory enactment by considering the particular section in the context of the statutory framework as a whole. (Palos Verdes Faculty Assn. v. Palos Verdes Peninsula Unified Sch. (1978) 21 Cal.3d 650, 659.) Ordinarily, the words of the statute provide the most reliable indication of legislative intent. (Pacific Gas & Electric Co. v. County of Stanislaus (1997) 16 Cal.4th 1143, 1152.)" (B.H. v. County of San Bernardino (2015) 62 Cal.4th 168, 189; see Imperial Merchant Services, Inc. v. Hunt (2009) 47 Cal.4th 381, 387 [review of a question of statutory construction is de novo].)

In all these respects the trial court's treatment of the issue might be dismissed as harmless if it were clear that the construction of section 26.3 put forward by Great Oaks in the guise of expert accounting testimony was correct. But by treating that question as a matter of evidentiary proof, the parties excused themselves from presenting more relevant data, such as legislative history, bearing on the purely legal question of what costs could be properly paid with the proceeds of the groundwater charges under the authority of section 26.3. We find nothing in the text of the statute that compels the conclusion reached by O'Rourke that "[t]he groundwater charge is intended [only] to compensate the District for its direct costs of providing injection or infiltration services to augment the takes from specific areas of groundwater pumping" (italics added) or that supports his testimony that "you need to be able to establish a local area cost of providing injection service[] in order to establish how much service—how much water is flowing as a replacement of groundwater."

Section 26.3 enumerates four "purposes" for which the "proceeds" of groundwater charges "are authorized and shall be used exclusively." The first three are to "pay the costs" of (1) "constructing, maintaining and operating facilities which will import water into the district which will benefit such zone or zones," (2) "purchasing water for importation into such zone or zones," and (3) "constructing, maintaining and operating facilities which will conserve or distribute water within such zone or zones, including facilities for ground water re-charge, surface distribution, and the purification and treatment of such water." (§ 26.3, subds. 1-3.) The fourth permitted purpose is to discharge indebtedness incurred for any of the first three. (§ 26.3, subd. 4.)

Nothing in the language of section 26.3 limits the application of groundwater charge proceeds to activities resulting directly in recharge of the groundwater basin, as distinct from conservation and maintenance of groundwater supplies—or indeed, of overall water supplies of a zone or zones. On the contrary, the opening sentence declares that the charge is intended to further "the protection and augmentation" (§ 26.3, italics added) not merely of groundwater, but of "the water supplies for users within a zone or zones of the district which are necessary for the public health, welfare and safety of the people of this State."¹⁸ (Ibid.)

18 The Act expressly require that the "act, and every part thereof, shall be liberally construed to promote the objects thereof, and to carry out its intents and purposes." (§ 34.) Consequently, the four authorized uses of groundwater charge revenue must be liberally construed to promote the purposes of "protection and augmentation of the water supplies for users within a zone or zones of the district . . . ." (§ 26.3.)

Section 26.3 does not mandate or prohibit any particular rate-setting methodology. It regulates only how the proceeds from those charges are spent. While the groundwater charges are authorized to be used "for the benefit of all who rely directly or indirectly upon the ground water supplies of such zone or zones and water imported into such zone or zones" (§ 26.3), the Act does not contain any language requiring individual groundwater extractors within such zone or zones to be equally benefitted or the groundwater charges levied on an individual groundwater extractor to be no more than the cost of the proportional benefit conferred on that extractor. Any such constraints must derive from other authority. Section 26.7 requires the rate for groundwater charges to be "established each year in accordance with a budget for that year approved by the board pursuant to this act, or amendments or adjustments to that budget" (§ 26.7, subd. (a)(3)(D)), but it does not specify the methodology for doing so.

By its terms, the Act authorizes the expenditure of groundwater charge revenues not only to build facilities for water importation and pay for imported water but also to pay for facilities to "conserve or distribute water within such zone or zones, including facilities for ground water re-charge, surface distribution, and the purification and treatment of such water." (§ 26.3, subd. 3, italics added.) The statutory language establishes that the direct recharge of the groundwater basin is not the sole activity to which groundwater charge revenues may properly be applied, but that they may also be spent on all forms of "conserv[ation] or distribut[ion] [of] water within [a] zone," including "surface distribution" and water "purification and treatment." (Ibid.) On its face, this language furnishes a complete answer to the recurring theme of the O'Rourke testimony that the charge was improperly predicated on the District's costs in generating and distributing treated water.

Indeed, the foregoing language may be read as a ratification of the District's "conjunctive use" policy, which treated all forms of water as fungible ("water pooling"). Elsewhere in its opinion, the trial court appeared to conclude that this policy was not in itself a violation of the District Act. It declared that "Great Oaks is advantaged" by the policy, which "involves the coordinated management of both surface [water] and groundwater in order to maximize the efficient use and preservation of the resource." It seems that the provision of alternative supplies of water serves the long-term interests of groundwater extractors by reducing the demands on the groundwater basin and helping to prevent the long-term depletion of groundwater. We see nothing in the record that would make it arbitrary, capricious, or irrational for the District to conclude that reduced demands on groundwater supplies benefit water retailers by preserving the commodity on which their long-term viability, if not survival, may depend.

This same reasoning undermines the suggestion in the O'Rourke testimony and the trial court's statement of decision that proceeds from groundwater charges could not be lawfully applied to "subsidize" treated water. We see nothing in the District Act that requires the District to limit the extent to which those proceeds may be applied to the costs of treating and distributing surface water for the benefit of a zone or zones. Section 26.3 explicitly allows groundwater charge revenues to be expended on such costs.

Section 26.3 appears to vest in the District the discretion to determine how much groundwater revenue should be spent on each of the authorized purposes. O'Rourke objected to the District's apparently having selected a rate based in part on the intention to price treated water competitively with groundwater, thus further reducing market pressures on the latter, and helping to preserve it. But if the Act permits the proceeds of groundwater charges to be used for facilities for the purification and treatment of distributed water—i.e., to "subsidize" treated water, the question of how much to do so seems one that the District is preeminently competent to answer, and the courts are not.

We have structured our discussion largely around the O'Rourke testimony because the trial court's finding of violations of the District Act appears to have depended most heavily on that testimony. However, the court also quoted the statement in a 2000 independent audit that " '[it appears the] District's cost of service calculations may no longer be valid especially with respect to servicing North [versus] South County [customers.] . . . [T]he revenue recovered from one or more of the District's customer classes may be subsidizing those from other classes[.] . . . [T]he District should review its agricultural water pricing practice for adequacy and fairness.' "¹⁹ (Italics added.)

19 This same audit noted that "[m]any utilities use cost of service studies primarily for background information, treating rate setting as a policy exercise." It commended the District for its "award-winning budget development process" and its "thorough budget tracking and reporting process."

The trial court noted that the District had failed to "change its policy in spite of the audit." According to the quoted language, however, the audit was merely raising possibilities and questions about the District's pricing practices, not condemning them.²⁰ In an apparent attempt to address those questions, the District engaged another firm that prepared a lengthy study on the subject. While that report suggested that the District might consider various "further refinements" in its methodology, it is far from clear that anything in it points to an abuse of discretion in the District's then practices—let alone in the rates it adopted four or five years later.

20 The court omitted some language from the material quoted, including language indicating the tentative nature of the audit's conclusions: "[T]he revenues recovered from one or more of the District's customer classes may be subsidizing those from other classes, creating an inequitable situation. If this assertion is valid, it is not surprising, in light of the considerable growth in Santa Clara County and the evolving environmental mandates." (Italics added.)

The trial court apparently relied largely on the studies just described for its conclusion that Great Oaks was "overcharged because of ... discounts given to agriculture water users." But the Act requires such "discounts," declaring that the charge for agricultural water "shall not exceed one-fourth of the rate for all water other than agricultural water." (§ 26.7, subd. (a)(3)(D), italics added.) To be sure, the rates adopted by the District went well beyond this ratio. The 2005-2006 rate for agricultural water was one-tenth of the rate for other groundwater produced.

The District defends the differential rates on the ground that, apart from the statutory mandate, "agricultural use puts less [sic] demands, including reliability demands, on the water supply."²¹ We will not attempt to evaluate this rationale except to observe that it appears never to have been challenged by Great Oaks on any basis distinct from that of its challenge to the "subsidy" of treated water or its claim that the District should have based its rates for groundwater charges on costs of service.

21 A resolution adopted by the District's board on March 16, 1999 established that the rate for agricultural water shall be one-tenth the rate of other water to, among other things, support the county and statewide policies favoring preservation of agricultural lands.

The District Act manifestly vested the District with discretion to provide a greater "discount" than statutorily mandated for extraction of agricultural water when it decreed that "each rate for agricultural water shall not exceed one-fourth of the rate for all water other than agricultural water." (§ 26.7, subd. (a)(3)(D), italics.) We see nothing in the record to sustain a conclusion that the ratio used by District was arbitrary, capricious, or irrational. Great Oaks offers no cogent criticism of the ratio adopted by the District, instead quoting the advisory reports while also asserting that the agricultural rate "is not at issue here."

In sum, nothing we have found in the record supports a determination that the groundwater rates set by the District for the 2005-2006 year were arbitrary, capricious, or unsupported by the evidence or that the District acted outside its statutory authority under the Act in fixing those rates. c. Alleged Misuse of Proceeds under Section 26.3

The trial court also found that the District had abused its discretion in spending the proceeds of the groundwater charges levied and collected. The court explained its misapplication-of-funds finding as follows: "The District improperly used groundwater revenue for activities not within the scope of [s]ection 26.3 of the Act. The District unwisely commingled groundwater revenue with other monies. The [District] over budgeted for employees, cost of equipment and water contract purchases to the detriment of Great Oaks by placing the excess money in its reserve fund, thus the Plaintiff was overcharged for groundwater fees and not credited back when appropriate."

This finding appears to rest largely on the testimony of Great Oaks accounting expert O'Rourke. The misuse-of-funds theory seems conceptually to be merely the other side of the miscalculation-of-costs theory discussed above. As already indicated, O'Rourke misconstrued section 26.3.

O'Rourke also described several practices by which the District had built a large reserve fund at the expense of ratepayers. He first described a practice involving what he called "phantom employees," whereby the District would budget an anticipated hire from the beginning of the financial period even though the position might not be filled, and the District might not intend to fill it, until months later. "[T]he person who's budgeted wasn't there the full budget period. So the net difference goes to reserves or becomes an increment of profit. Since they're [a] 'non for profit entity' it builds up their cash balance." He appeared to say that the District had about 90 such "phantom employees," which was roughly 10 percent of its total workforce. O'Rourke described this practice as a product of "the way the District calculates their budget," which "encourages them to set the budget amount as high as possible[,] [s]o that . . . when they make the computation for the rate for groundwater[,] they've got that amount recovered. In subsequent budgets there is no refund of prior year over recoveries or over budget amounts."

Similarly, he testified, the District had a practice of assigning excessive charges, which he said had been so declared by the county auditor's office, for interdepartmental equipment use. This practice, too, operated to fund a "very large reserve surplus" and violated "both State Controller and . . . U.S. Controller's Office . . . regulations." A third practice involved relying on initial estimated prices for State Water Project water, while ignoring any subsequent downward adjustments in the actual price paid.

By means such as these, O'Rourke testified, the District had amassed reserves of some $110 million prior to imposition of the 2005-2006 groundwater charge. He compared this sum to the District's annual revenues of about $100 million. He opined that the District used these reserve funds to finance "discretionary" investments, as "an alternative to borrowing funds." This had the effect of "front[-]load[ing] the expenditure" for projects, so that they were paid for by current users, in contrast to an investment financed with borrowed funds which would be repaid over the life of the asset by users actually benefiting from it. Insofar as the groundwater charge is used for such purposes, he opined, it "includes amounts for potential or future services or use."

O'Rourke's argument does not establish that reserves funded with proceeds from groundwater charges will not be used for purposes within the scope of section 26.3, which are broader than he recognized. While we do not wish to minimize the concerns that might arise from the practices he described, we are once again left to guess at what evidence or rule of law supports the conclusion that those practices violated the District Act. Section 26.3 authorizes the District to use groundwater proceeds for specified activities. But it does not forbid the District from attempting to estimate the cost of such activities prior to engaging in them; indeed, it is difficult to conceive how it could function without such forward budgeting. Nor does it place any express limits on how far in advance of planned activities the District may begin to accumulate funds for eventual application to them.²²

22 At the annual public meeting on the proposed budget, the District Board must "review its financial reserves, including the justification therefor, and its reserve management policy." (§ 20, subd. (b).) Whether the financial reserves amassed by the District comport with the District's reserve management policy is an issue separate from the question whether proceeds from groundwater charges levied and collected for the 2005-2006 tax year were actually spent on purposes not authorized by section 26.3 of the Act.

Insofar as the trial court found that the District had unwisely commingled revenue from groundwater charges with revenue from other sources and concluded that such commingling constituted an abuse of discretion, we note that "[i]n determining whether an abuse of discretion has occurred, a court may not substitute its judgment for that of the administrative board [citation], and if reasonable minds may disagree as to the wisdom of the board's action, its determination must be upheld [citation]." (Manjares v. Newton (1966) 64 Cal.2d 365, 370-371.) O'Rourke reported that groundwater charge proceeds were commingled in the Water Utility Enterprise Fund and asserted that the District did not comply with the "State Controller's Uniform System of Accounts for Water Utility Districts" with respect to its accounting of groundwater charge revenues and expenditures of those revenues.²³ But we see nothing in the District Act itself that required physical segregation of the proceeds of groundwater charges from other revenue sources. The District Act does not dictate the District's method of accounting or expressly prohibit the District from aggregating revenue from different sources in its water enterprise fund.²⁴

23 The State Controller's Uniform System of Accounts for Water Utility Districts, dated 2000, indicated that water utilities should use enterprise accounting and a type of proprietary fund "referred to as an enterprise fund." Even as to "Restricted Assets," the document stated that "physical segregation" of those assets was "not necessary unless legally required." As to budgeting, the 2000 State Controller's Uniform System of Accounts for Water Utility Districts recommended "flexible budgets" "show[ing] expected revenues and expenses for various levels of activity" rather than "[f]ixed dollar budgets."

24 Section 26.3 states that "[t]he district may apply to any one or more of the purposes set forth in paragraphs 1, 2, 3 and 4 of this section any or all revenues received by the district from water sale contracts executed by the district pursuant to this act."

We conclude that the trial court's findings of violations of the District Act cannot be sustained on the present record.

DISPOSITION

The judgment is reversed.

/s/_________

ELIA, J. WE CONCUR: /s/_________
PREMO, Acting P. J. /s/_________
MIHARA, J.