By Katherine J. Hart

In Voices for Rural Living v. El Dorado Irrigation District, the Court of Appeal, Third Appellate District, affirmed the trial court’s determinations that (1) the small project categorical exemption in CEQA did not apply to exempt an agreement for water service from CEQA review due to the unusual circumstances surrounding the agreement, and (2) a local water district lacked authority to disregard or deem unconstitutional annexation conditions previously imposed by the local agency formation commission (LAFCo).

Background Facts

The Shingle Springs Band of Miwok Indians (Tribe) possesses 60 acres of land located in El Dorado County on land held in trust by the Bureau of Indian Affairs for the Tribe (Rancheria). In 1987, the Tribe entered into an annexation agreement to be included within the water service area for the El Dorado Irrigation District (EID). Under the agreement, EID agreed to provide water to tribal residents living on the Rancheria. The El Dorado County LAFCo approved the annexation in 1989 subject to the condition that EID could supply water to the Rancheria for residential and accessory uses only, and only in an amount necessary to serve up to 40 residential lots. Neither EID nor the Tribe challenged the LAFCo condition.

The Tribe proposed the construction of a casino and hotel on the Rancheria, as well as a new interchange to connect the Rancheria to Highway 50. In 2001, an Environmental Assessment (EA) of the casino and hotel was prepared by the federal Bureau of Indian Affairs (BIA) and the National Indian Gaming Commission (NIGC) pursuant to NEPA. An EIR for the interchange project was prepared by Caltrans pursuant to CEQA and NEPA.

The EA noted that the project would require an estimated 98,000 gallons per day to meet peak demand and 75,700 gallons per day to meet average demand. It also discussed that there were two options for delivering water to the project: (1) via EID through an existing 3-inch water meter or (2) via truck on a daily basis. The EA stated that while the existing 3-inch water meter was capable of delivering a maximum continuous flow of 250 gallons per minute (well over the 70 gallons per minute estimated for the project), the dispute over the validity of the annexation conditions imposed by LAFCo would need to be resolved. The EA noted that if the dispute was not resolved, the Tribe could truck water to the Rancheria, and estimated that 25 truck trips per day would provide sufficient water to meet project demands. Despite the lack of resolution on the issue, or analysis of the potential impacts of running 25 trucks per day to the site, the EA concluded that EID’s delivery of water to the Rancheria would have a less-than-significant impact on public services. The EIR prepared by Caltrans contained no additional information or analysis of the water supply impacts of the casino/hotel project.

In May 2008, upon determining that the annexation conditions imposed by LAFCo were unconstitutional, EID approved a Memorandum of Understanding (MOU) with the Tribe to provide water to the Rancheria at a maximum rate of 95 gallons per minute, with a total average volume of 135,000 gallons per day, which is the equivalent to water used by approximately 261 homes (well in excess of the annexation condition limitation of 40 residential units). Because the physical improvements were limited to installing a short section of pipeline to link the meter to existing water main on the Rancheria site, EID issued a notice of exemption based on an exemption for new construction or conversion of small structures (14 CCR § 15303).

Voices for Rural Living challenged EID’s approval of the MOU on the grounds that EID failed to prepare an EIR pursuant to CEQA, failed to ensure the MOU was consistent with the County’s general plan, and failed to comply with the LAFCo Act and the LAFCo’s conditions of annexation imposed in 1989.

The CEQA Claims

The appellate court affirmed the trial court’s ruling that substantial evidence of a fair argument existed to show that the project might cause a significant effect on the environment; therefore, the unusual circumstances exception to the exemption applied. However, it vacated the trial court’s order requiring EID to prepare an EIR and instead, directed the court to order EID to conduct further CEQA review, as appropriate.

EID analyzed 20 different “unusual circumstances” that could result from the project, including, whether the project would involve a substantial change in demand for municipal services. The EID staff concluded that EID had adequate water from existing sources to serve the project. More specifically, the staff determined that while the project would reduce the supply area’s available water supply by almost 10 percent, all of the water would be supplied to the Rancheria from existing sources based on existing, approved water rights that had undergone CEQA review or dated back to the 19th century; thus, a 10 percent increase in water demand was not a substantial change in available water supplies and the unusual circumstances exception did not apply, exempting the MOU from further review under CEQA.

In reviewing the exemption determination, the trial court determined that the project would trigger unusual circumstances because under the MOU, the Rancheria would increase its water usage from 45 residential units to 261 units, a 579 percent increase over existing and such usage would utilize 14 (not 10) percent of EID’s uncommitted water supply. Furthermore, the trial court noted that EID had overlooked potential water supply in times of drought, as well as the “in-stream flow obligations” to which it had recently agreed in regulatory proceedings.

Standard of Review on Appeal

In determining which standard of review to use, the court of appeal in this case relied upon Banker’s Hill, Hillcrest, Park West Community Preservation Group v. City of San Diego (2006) 139 Cal.App.4th 249 (Banker’s Hill). In Banker’s Hill, the court of appeal looked at two issues: (1) did the project present unusual circumstances; and (2) was there a reasonable possibility of a significant effect on the environment due to the unusual circumstances. The first prong of this test is a question of law and thus, is reviewed de novo. The second prong of the test is a question of fact and there is a split of opinion among appellate courts regarding whether to review the question under the fair argument standard or the substantial evidence standard of review. (See also, Berkeley Hillside Preservation v. City of Berkeley (May 23, 2012, review granted, 2012 Cal. LEXIS 5038) 203 Cal.App.4th 656, and Robinson v. City and County of San Francisco (July 20, 2012, modified August 21, 2012, A132385)  208 Cal.App.4th 950.) Here, the Third Appellate District elected to use the less deferential and more conservative fair argument standard to evaluate the second prong of the test, as was done in the Banker’s Hill case and the Berkeley Hillside case now pending before the California Supreme Court.

Unusual Circumstance Exception Analysis

In his decision, Justice Nicholson explained that an unusual circumstance is a feature of a project which distinguishes it from other projects in the same exempt class. In this case, the class 3 categorical exemption for construction and location of limited numbers of new, small facilities and structures was at issue. The court also reasoned that, “The sheer amount of water to be conveyed under the MOU obviously is a fact that distinguishes the project from the type of projects contemplated by the class 3 categorical exemption.” More particularly, the court compared the project (which would create a demand equivalent to 216 new water hookups and require an entirely new freeway interchange) to a standard or normal project contemplated under the class 3 exemption like one (not 216) single-family residence. Thus, as a matter of law, approving and implementing the MOU involved an unusual circumstance.

Having established that the MOU presented an unusual circumstance, the court turned to the second prong of the analysis – whether the MOU presented a reasonable possibility of a significant effect on the environment due to the project’s unusual circumstances. Citing to Vineyard Area Citizens for Responsible Growth, Inc. v. City of Rancho Cordova (2007) 40 Cal.4th 412), the appellate court looked at whether evidence in the record showed there was a possibility that EID would not have sufficient water to meet project and existing demand, and whether providing all the water promised under the MOU could create impacts to the environment. Relying upon EID’s own Drought Preparedness Plan, the appellate court held: “There is evidence in the record upon which a fair argument can be made that approving the project could exacerbate the environmental consequences of a drought.” So, while the court acknowledged there would be no potential impacts during non-drought years, there was such potential for drought years given the possible impacts of climate change on available water supply combined with the new in-stream flow restrictions placed on EID’s withdraw of water from the American River.

Compliance with the LAFCO Act and Conditions of Annexations

In short, the appellate court upheld the trial court’s conclusion that EID acted in excess of its jurisdiction by determining the LAFCO restriction imposed as part of the 1989 annexation were unconstitutional and approving the MOU in violation of the annexation conditions. For further discussion of the court of appeal’s analysis on the LAFCO issues, see Two Recent Decisions Highlight the Special Powers Held by LAFCo.


Categorical exemptions can be a trap for the CEQA-unwary as they are often narrowly construed by the courts. With respect to the class 3 exemption, as evidenced by Banker’s Hill and its progeny, the unusual circumstances exception to an exemption often swallows the rule as a result of the fair argument standard of review. The Supreme Court will be weighing in shortly on the issue of the standard of review for the second prong of the class 3 exemption analysis. Hopefully the Court’s decision will clarify which standard of review governs the unusual circumstances test once and for all. Even so, agencies should proceed with caution when looking to employ the class 3 categorical exemption for a project (or any categorical exemption for that matter). As a standard practice, categorical exemptions should only be used to exempt a project from CEQA review in the most obvious of circumstances and after considering all key facts and potential impacts.

Katherine J. Hart is Senior Counsel at Abbott & Kindermann, LLP.  For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, LLP at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, or the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.