(September 25, 2007) The California Chamber of Commerce and other business groups have joined forces in court to protect fee payers’ rights and bring equity to those directly impacted by the fees.

In the case of the California Farm Bureau Federation v. California State Water Resources Control Board (CSWRCB), the issues before the State Supreme Court are:

• Whether the charge on water rights permit applicants and license holders is indeed a fee;
• If it is a valid fee, can the fee be charged to contractors who receive water deliveries from the federal government; and
• How fees should be calculated in the future if the current system is deemed to be inaccurate.

Also joining in filing the "friend of the court" brief in support of the California Farm Bureau Federation were the Personal Insurance Federation of California, Association of California Insurance Companies, Wine Institute, National Federation of Independent Business Legal Foundation, and the California Taxpayers' Association.

Read the brief

Court of Appeal Ruling

The CSWRCB imposes fees on water rights permit applicants and license holders; however, the permits and license issued by the department account for only a small portion of the water rights protected by the CSWRCB’s regulatory oversight. A large percent of water rights in California predate requirements for permits and licensure and therefore the holders of those rights don’t pay the fees. The federal government also accounts for a large percent of the water diversion in the state, with those rights being used for hydroelectric projects and the Central Valley Project. Because the federal government is sovereign, the state cannot force federal agencies to pay any fees.

The fees imposed by the CSWRCB were set up under the assumption that 40 percent of the regulated community would not pay the charge, either from simple refusal or based on sovereign immunity. As a result, the remainder of the fee payers were assessed an amount in excess of their proportionate share of the regulatory burden in order to make up this deficit. Individuals and agencies that contracted with the federal government for water deliveries were assessed a fee of more than 10 times higher than the fees charged for those engaged in the direct diversion of water. In the first year of collecting fees, the CSWRCB took in nearly twice the actual cost of the running the CSWRCB permits and license program.

The Third District Court of Appeal ruled that the fees charged under the regulation were not “proportional” and ordered the CSWRCB to come up with a new basis for calculating the fees.

Current law recognizes that there are limits on regulatory fees and restricts the amount of revenue generated by the fee to the amount “necessary to recover the costs incurred in connection with the issuance, administration, review, monitoring and enforcement of permits." There is no simple way for the regulated community to enforce those limits, however.

Creating a Refund Remedy

In its brief, the CalChamber urges the court to create and require a refund remedy for individuals and businesses that overpaid. This remedy would allow any fee payer the opportunity to seek reimbursement without having to challenge the legality of the fee itself. A refund remedy will also allow all regulated parties to limit the amount of the refund to what is required for the regulated program.

This case will set a precedent for the allocation of surplus fees. The refund remedy, supported by CalChamber, would require an agency that collects too much money to refund the excess to the user and eliminate the fee surplus and thus the temptation to divert a surplus to other programs in lean budget years. Finally, the refund remedy also may open the door to individual challenges to the allocation of regulatory fees to unrelated programs.

The CalChamber urged the court to consider requiring the state to offer a prompt and effective administrative remedy. This way, individuals and businesses subject to these new charges would have the ability to seek a refund when an agency overcharges or improperly calculates a fee. When a business or individual has been charged more than the cost of the regulatory program, a refund should be available instead of requiring the overcharged party to challenge the entire program.

Similarly, when fees are calculated so that one group subsidizes another, or is otherwise charged more than its proportionate share of the regulatory burden, the administrative remedy could offer individualized adjustments to the fee. The CalChamber believes that individual refunds will be far preferred by the agency to the prospect of having their entire fee invalidated.

The State Supreme Court can grant some relief to both the state and the fee payers by requiring an administrative remedy for challenges to the manner in which an agency implements an otherwise constitutional enactment. Such a remedy would afford individual fee payers a forum to challenge the application of the fee without calling into question the funding for an entire statewide program.

Read the brief

Staff Contact: Erika Frank