By Kevin Christensen

SAN DIEGO — The city of San Diego is facing a lawsuit seeking to reclaim money that was allegedly overcharged to residential users for sewer services.

The case may also present more problems to the city’s financial standing on Wall Street.

The plaintiff, local consumer advocate Michael Shames, charges that the city knowingly overcharged residential users on sewer bills for services they didn’t use — the treatment and discharge of organics.

On the other hand, companies that were producing the organics weren’t billed based on their usage.

The issue came to a head at the San Diego City Council on June 8 when they agreed to raise sewer rates for the businesses.

Shames, executor director of consumer advocacy group the Utility Consumer Action Network, is leading a class action lawsuit to retain the funds, which could amount to as much as $10 million, said Eric Benink, an attorney with Krause & Kalfayan, who is representing Shames.

Representatives of the San Diego City Attorney’s Office said they have not been served the lawsuit and declined comment.

If the lawsuit is proven to have merit, it will affect the city’s financial ratings and potentially drive up the cost of borrowing money, said Lisa Briggs, executive director of the San Diego County Taxpayers Association.

“The markets will view this as yet another potential liability,” Briggs said. “This, added to all of the other issues, may make Wall Street nervous.”

The lawsuit hinges on the city’s acceptance of 17 separate federal and state Clean Water Grants and eight SRF loans totaling about $266 million, according to a city financial report for fiscal year ended June 30, 2003.

As part of the loan agreements, the city should have created a rate case that charged each user based on the services they were using.

The city failed to do so until this year.

Benink said the city basically admitted overcharging residential users by not changing the rates in the city financial report. “So, they did not know there was a lack of disparity between the charges to residential and the charges to business customers,” he said.

The city has been an ongoing participant in the Federal Clean Water Grant program since the early 1970s and California’s State Revolving Fund low-interest loan programs.

AS a condition of receiving the grants and loans, the city must maintain a State Water Resources Control Board, approved wastewater user rate system that meets certain requirements.

The SWRCB requires that the wastewater system discharge into the Pacific Ocean does not contain too many organic materials.

Certain commercial and industrial users discharge wastewater with the higher concentration of the organic amounts.

However, organics were never included into the city’s billing structure, said Dennis Kahlie, utilities finance administrator for the City Treasurer, in an earlier interview.

As a result, residential, commercial and industrial customers that discharged less organic matter have been paying more than they should, according to Kahlie.

Thanks to the new rate structure, users that have higher levels of organics will be paying more than they have been in the past.

Kahlie would not comment on the case.

The city knew that it was overcharging residential users and did nothing immediately to change rates when the issue was discovered, said Councilwoman Donna Frye.

In 2001, the city contracted a private consultant firm to design a new rate structure that would charge businesses for their organics discharge.

Frye said members of the city government went out of their way to ensure that the study never saw the light of day, and keep residents paying more and businesses paying less.

Frye said City Council officials — responsible for approving all rate schedules — knew the system was charging low-users disproportionately more and not in compliance with the agreed requirements.

In October 2001, the city raised the sewer rate without completing a cost of service study.

Shortly after the rate increase, the City Council began discussing the completion of a sewer rate study and implementation of the new charges in early 2002. They decided — thanks largely in part to lobbying from former Councilman Byron Wear — to not release it publicly, Frye said.

“They agreed that we were not going to move forward with the rate study until we absolutely had to,” Frye said. “Their goal was to table the study, specifically.”

In the meantime, city staff continued to work to develop a rate case, Frye added.