This is a description of published appellate decisions and constitutional text, assembled so that a utility can see what a challenge asks for. It is not legal advice, and the memo a study produces on the cost basis is written to be handed to the utility’s own counsel rather than to substitute for one.
Two states have the most developed body of law on when a utility charge stops being a fee. Neither one binds a utility outside it. Both are worth reading anywhere, because the question a court asks in each is the question a study either answers or does not: what is this charge recovering, and where is that written down.
Michigan: the three-part test
In Bolt v City of Lansing, 459 Mich 152 (1998), the Michigan Supreme Court held that a stormwater service charge imposed by ordinance was a tax rather than a user fee, and therefore required voter approval under the Headlee Amendment. The Court set out three criteria for distinguishing the two:
- A user fee serves a regulatory purpose rather than a general revenue-raising one.
- A user fee is proportionate to the necessary cost of the service provided.
- A user fee is voluntary, in the sense that the payer has a genuine choice about incurring it.
The factors are weighed together rather than applied in isolation, and no single one is generally dispositive.
The test has been applied since in both directions. In Platt Convenience, Inc. v City of Ann Arbor (2024), the Court of Appeals upheld Ann Arbor’s stormwater utility charge, finding the first two factors favoured a valid user fee even though the third did not. In Heos v City of East Lansing, decided by the Michigan Supreme Court on 3 February 2025, a five percent electric franchise fee failed all three: it was collected for general revenue, it was not proportionate to any cost the city incurred, and a consumer who did not pay it could have the service shut off. The Court held the fee was an unlawful tax.
The practical reading for a water or sewer utility: the second factor is the one a rate study addresses, and it is addressed by documenting the cost the charge recovers and the method by which that cost was allocated. The third factor is largely determined by the nature of the service rather than by anything a study can change.
California: Proposition 218
Article XIII D, section 6 of the California Constitution, added by Proposition 218 in 1996, governs property-related fees, which includes water, sewer and refuse charges. Section 6(b) imposes requirements that operate as a checklist:
- Revenues from the fee may not exceed the funds required to provide the service.
- Revenues may not be used for any purpose other than that for which the fee was imposed.
- The amount imposed on any parcel may not exceed the proportional cost of the service attributable to that parcel — section 6(b)(3), the subdivision most rate challenges are brought under.
- The fee may not be imposed for a service unless it is actually used by, or immediately available to, the owner of the parcel.
Two appellate decisions define what 6(b)(3) requires of a tiered rate. In Capistrano Taxpayers Assn., Inc. v City of San Juan Capistrano (2015) 235 Cal.App.4th 1493, the court affirmed that the city’s tiered rates violated Proposition 218: the agency had allocated its costs among the tiers according to pre-determined usage budgets rather than calculating what it cost to provide water at each tier. In Coziahr v Otay Water District (2024) 103 Cal.App.5th 785, the Fourth District held that the district had not established compliance where its tier differentials rested on industry practice, conservation objectives and theoretical peaking factors without data substantiating the cost difference between tiers.
Neither case holds that tiered rates are unlawful. Both hold that the differential between tiers is a cost claim, and that the agency carries the burden of proving it.
California: the newer procedural requirements
AB 2257, effective 1 January 2025, added sections 53759.1 and 53759.2 to the Government Code. It gives agencies an optional procedure that, if followed, establishes an administrative remedy a ratepayer must exhaust before bringing a Proposition 218 challenge.
The procedure has a shape worth noting even outside California, because it describes what a defensible record looks like. The agency posts a written basis for the fee on its website and includes a link in the notice, and provides it by mail on request. The written basis has to be available no less than 45 days before the objection deadline. Ratepayers have at least 45 days from the notice to object in writing, stating the grounds, and the notice must prominently warn that failing to object in time bars a later challenge. The agency prepares written responses to the objections received, and litigation is then limited to the record of the rate-setting proceeding and to persons who objected.
The effect is to move the whole argument forward in time. The evidence a court would eventually look at has to exist, be published, and be responded to before the rate is adopted.
Other states
Other states reach comparable exposure through different language: a state constitutional limit on taxation, a statutory requirement that municipal utility rates be just and reasonable, a public utility commission’s jurisdiction over a district, or the common law rule that a municipal charge exceeding the cost of service is an ultra vires tax. The vocabulary and the burden of proof differ. The record that answers the question does not differ much: what the charge recovers, how that cost was allocated, which document each figure came from, and what notice was given before it was adopted.
What this means for a study
Everything above resolves into four things a study either carries or does not.
- The cost the charge recovers, stated as a figure with the document it came out of.
- The allocation method, named, and applied to data from the utility’s own records rather than to a default where the records exist.
- The differentials between classes and tiers, each tied to the cost that produced it rather than to a policy objective.
- The procedural file: the notice, the hearing, and the supporting material, published on the timeline the jurisdiction requires.
A study assembled this way is not a defence against a challenge. It is the thing a challenge asks to see.
Sources
Bolt v City of Lansing, 459 Mich 152; 587 NW2d 264 (1998). Platt Convenience, Inc. v City of Ann Arbor, Mich Ct App Docket No. 359013 (4 October 2024). Heos v City of East Lansing, Mich Supreme Court Docket No. 165763 (3 February 2025). California Constitution, article XIII D, section 6. Capistrano Taxpayers Assn., Inc. v City of San Juan Capistrano (2015) 235 Cal.App.4th 1493. Coziahr v Otay Water District (2024) 103 Cal.App.5th 785. California Assembly Bill 2257 (2023-2024), adding Government Code sections 53759.1 and 53759.2.
If a citation here is wrong, it is worth correcting. Email [email protected] with the case and the point; we correct the page and note what changed and when.