San Diego For years, San Diego subsidized affluent effluent. Now, victims want compensation. In mid May, superior-court judge Ronald Prager is slated to hear arguments in a case filed on behalf of city residential property owners who were overcharged for sewer service for ten years. Commercial and industrial sewer users were undercharged, points out the suit filed by Michael Shames, executive director of the Utility Consumers' Action Network. Next month, the primary plaintiff attorney, Eric J. Benink, seeks class-action status that would permit city property owners to get refunds that could collectively reach $200 million.
Many of the major facts are not in dispute. After poking and prodding from councilmember Donna Frye, the city admitted in March of 2004 that the fairness of its sewer bills was in question. The city confessed then that it had not reported the alleged billing favoritism -- and its possible economic consequences -- in bond prospectuses dating back to 1995. In June of last year, the city council revised sewer rates -- boosting those of commercial users and lowering those of residents. But the city did not offer to reimburse residential ratepayers for a decade of overpayment. Shames requested a refund last year; when he was turned down, he took steps to become a sewer suer.
Mayor Dick Murphy vociferously claims that the city is in no risk of bankruptcy. But Benink says that some attorneys who are defending the suit have warned that a bankruptcy could disrupt any financial recovery. John Riley, the deputy city attorney who is handling the defense, says he has made no such threat. In the course of pretrial conferences, "Bankruptcy was brought up [by the defense], but not by Riley," says Benink.
On November 5, 1996, California voters approved Proposition 218, the "Right to Vote on Taxes Act." Essentially, it prevents governments from raising taxes by camouflaging them as fees. "Any fee that is imposed must be proportionately charged among people who are charged," says Benink. "We are hanging our hat on that," as well as federal and state regulations mandating the same balanced billing.
Both federal Environmental Protection Agency and State Water Resources Control Board regulations require that sewer users pay their proportionate share, the suit stresses. Since the early 1970s, the city has received grants and low-interest wastewater loans from both the federal government and the state. To accept that money, the city is required to charge users in proportion to their usage.
In late 2003 and early 2004, the State Water Resources Control Board wrote to the city, saying it might be out of compliance, and if it didn't shape up, it might have to return $266 million of funds it had received. In the filing with municipal-bond authorities in March of 2004, the city admitted that because the proportionality of its bills was in question, it could lose that money. The city said that an argument could be made that its billing system was "disproportionately better for certain commercial and industrial customers of the Wastewater System that discharge large volumes of organic material (such as kelp), and disproportionately worse for other customers that do not."
In short, consumers had been getting screwed while businesses had been getting massaged. It's all part of San Diego's strategy of being "business friendly."
In October of 2001, the city council voted to raise sewer rates. Frye, who had only been in office a few months, wanted to know if there had been a cost-of-service study indicating whether business and residential users were being charged in proportion to their usage, as required by law. "Nothing really happened," says Frye, who is likely to be a mayoral candidate in the fall against the establishment/labor-anointed councilmember Scott Peters.
Then, in January of 2002, council went into closed session. There was a discussion of a cost-of-service study, "but essentially the vote was to note and file. The mayor and council said, 'We're not going to do anything until we have to.' It was very clear that if rates would have to be adjusted for proportionality, some businesses would see their rates increased. The mayor and most councilmembers didn't want to do that," says Frye, who strenuously opposed the measure. "The chamber of commerce and other business groups have consistently lobbied for lower sewer and water rates for business. They want to maintain the unbalanced rates."
In May of 2002, there was a hearing about the wastewater department's budget. Frye asked again about the sewer cost-of-service study. "It got real quiet when I asked the question," she recalls. Mayor Murphy said she must be confused: there was no such study. A representative of the city manager's office agreed with the mayor. She believed -- and believes -- that they were lying.
In November of 2002, council revealed it was going into closed session to discuss the cost-of-service study -- the one that supposedly did not exist. Frye wrote to then-city attorney Casey Gwinn, saying such a secret discussion was a violation of the Brown Act, which restricts governments' ability to act in secrecy. She requested official documents under the Public Records Act. In late November, she was given a draft of the study. In the next few months, the city manager's office claimed it had to update it. The final documents were released in October of 2003. Shortly, the state alerted San Diego that it was in violation of proportionality laws.
In January of 2004, the city shocked its citizens by admitting that its bond prospectuses had been inaccurate since 1996, primarily by glossing over the pension woes. The next month, the state water board wrote another warning letter about sewer-billing disparities. "Once I learned about the letter from the state board in February of 2004," says Frye, "I immediately went to the city manager and asked if the information was provided in any of the preliminary official statements related to the sewer bonds. That led to the confession that they were not." Then came the March 2004 admission of dubious billing filed with municipal bond authorities. "I never would have imagined that my Clean Water Act world and bond-disclosure world would intersect."
The administration claims that the city wasn't protecting big sewer users dishonestly. "There were legal issues that arose," says a spokesperson. The city attorney had to look at those issues and give an opinion on how to proceed. "In January of 2003 the information was stale, so there had to be an update." That's why the study was not made public until October of 2003, says the spokesperson. However, this explanation does not address most of Frye's observations.
In the Shames suit, Riley is arguing that Proposition 218 language doesn't apply. Water usage "is a commodity and not a tax that would be governed by 218," he says. "We don't bill people who live in Point Loma less because they are closer to the main pump station."
In any case, the statute of limitations in this case may be as few as 100 days -- at most, three years, says Riley. Therefore, $200 million is a ludicrous sum, he claims. He also says that usage proportionality can't be determined with exactitude.
The statute of limitations "is something that will require a judge to determine," counters Benink. He agrees that "you can never be exact on proportionality, but the city omitted an extremely important cost component: organics, and that's the focus of the suit. The city failed to charge proportionately." Legally, organic pollutants, or bacteria-laden materials that absorb oxygen from the water, cannot be excessively dumped in the ocean. Complianace costs money that hasn't been paid by the offenders. This suit attempts to rectify that.