Final Judgment in Rate Case Secures Landmark Water Authority Victories

A final judgment entered in San Francisco Superior Court late Wednesday affirms victories by the San Diego County Water Authority in both phases of two landmark lawsuits challenging rates set by the Metropolitan Water District of Southern California. The judgment also orders MWD to recalculate the Water Authority’s statutory right to MWD water supply – a right MWD had illegally under-calculated for more than a decade.

The final judgment by Judge Curtis E.A. Karnow combines rulings he issued in 2014 and 2015. Key elements of the judgment are: the invalidation of MWD’s unlawful transportation rates for 2011-2014; an order directing MWD to pay the Water Authority $188.3 million in contract damages; and a finding that MWD has under-calculated the Water Authority’s right to MWD water by tens of thousands of acre-feet of water per year.

In addition, the judge said MWD owes the Water Authority $46.6 million in prejudgment interest, for a total judgment of nearly $235 million. That amount will accrue simple post-judgment interest of 7 percent annually, meaning the total amount due to the Water Authority will grow by $45,000 per day – or $16.4 million per year – until MWD pays what it owes to the Water Authority.

“This final judgment represents a sweeping, multi-billion-dollar victory for the Water Authority and San Diego County ratepayers,” said Mark Weston, chair of the Water Authority’s Board of Directors. “While the damages award for four years of illegal charges by MWD is a significant -- and growing -- figure, the greatest impact of this victory will be the prevention of future overcharges that, over the first 45-year term of our water transfer with the Imperial Irrigation District, would amount to more than $2 billion.

“The water rights victory increases our rights to MWD’s water supply in an amount comparable to, or greater than the output of the $1 billion Carlsbad Desalination Plant,” Weston added.

The judgment completes the trial court phase of lawsuits that were filed in 2010 and 2012 and have been vigorously contested in both the courtroom and the MWD board room.

“This is a true vindication for the Water Authority board and staff, who had the courage to spend the last two decades fighting to prevent MWD from gouging the people of San Diego with unlawful rates,” said Dan Purcell, outside counsel for the Water Authority with Keker & Van Nest in San Francisco.

In another major ruling on Wednesday, Judge Karnow issued a peremptory writ of mandate that, going forward, commands MWD to:

• “Enact only legal transportation and wheeling rates in the future, and specifically, not to do the things this Court held were illegal and/or unconstitutional in the Court’s April 24, 2014 Statement of Decision….”
• “…henceforth set its rates based upon cost causation – that is, Met must charge for its services based only on what it costs to provide them.”
• “…not… include in its future transportation or wheeling rates costs that are not attributable to Met’s own conveyance system or to its actual costs in conveying water.”
• “…allocate its costs associated with local water supply development, water reclamation, desalination and conservation programs to Met’s rates and charges based on cost causation. The costs of such programs may be included in Met’s wheeling rate only to the extent that the costs of transporting wheeled (i.e. non-Met) water are a function of the costs of such programs.”

On his order barring MWD from including in its future transportation or wheeling rates costs that are not attributable to MWD’s own conveyance system, Judge Karnow explicitly ruled that:

“Met does not own or operate the State Water Project (SWP) or the SWP transportation facilities, nor does Met transport SWP water from Northern California to the terminal reservoirs at Castaic Lake and Lake Perris. The SWP is not part of Met’s conveyance system, and the SWP conveyance facilities are not a part of Met’s conveyance facilities.”

This is a very significant aspect of the ruling because MWD claimed throughout the trial that the separately owned and operated California Department of Water Resources’ State Water Project facilities were actually part of MWD’s own conveyance system and thus could be treated as an MWD “transportation” cost. MWD’s State Water Project costs constitute the largest share of costs that the Court held were improperly charged by MWD to the Water Authority for transporting the Water Authority’s independent Colorado River supplies.

In addition, as part of the judgment, Judge Karnow ruled that he will retain continuing jurisdiction to enforce his judgment and the peremptory writ of mandate.

“This judgment and writ of mandate should have a powerful deterrent effect on MWD’s future conduct,” said Warren Braunig, outside counsel for the Water Authority with Keker & Van Nest. “If MWD continues to do those things the trial court found were illegal, MWD will not only be violating the law but will also be in contempt of a court order.”

The Water Authority is represented by Keker and Van Nest, and by Brownstein Hyatt Farber Schreck, a national firm with offices in San Diego.

“The court’s ruling holds MWD accountable to demonstrate a legitimate process of allocating its costs according to member agency demands that cause those costs to be incurred in the first place,” said Chris Frahm, shareholder at Brownstein Hyatt Farber Schreck and special counsel to the Water Authority. “This outstanding recovery on behalf of the Water Authority should serve as a wake-up call going forward that according to California law, MWD has the burden of proving it is charging lawful rates.”

As expected, on Monday, Nov. 16, MWD filed a motion for a new trial in the litigation. That motion will be heard on Dec. 17. The court has 60 days from Nov. 16 to rule on the motion for a new trial. In addition, MWD has already has said it will appeal the trial court’s decision, a move that could significantly delay payment of the Water Authority’s judgment. The Water Authority’s Board of Directors already has determined that the agency will deduct its litigation expenses and return the remaining money to its 24 member agencies in proportion to their payment of MWD’s illegal overcharges over the four years in dispute.

As the prevailing party in the lawsuit, the Water Authority will file a motion to recover its attorney’s fees and costs from MWD.

In August, Judge Karnow issued a final ruling that rejected all of MWD’s defenses to the Water Authority’s legal challenges, including the contention that the Water Authority consented to being overcharged by the Los Angeles-based wholesaler. Instead, he said the Water Authority is entitled to every penny of the damages it claimed – four years of overpayments totaling $188.3 million, plus interest. If allowed to stand, MWD’s overcharges against the San Diego region would have exceeded $2 billion over 45 years.

Judge Karnow also ruled in August that MWD’s interpretation of a statutory water rights formula has improperly excluded payments by the Water Authority for transporting the Water Authority’s independent Colorado River water supplies. By law, each MWD member agency is entitled to a percentage of MWD’s available water supplies at any time based on all payments made to MWD throughout history – “excepting the purchase of water.”

The court found that the Water Authority has been purchasing transportation service from MWD to convey water supplies the Water Authority buys from the Imperial Irrigation District and conserved water from lining the All-American and Coachella canals in the Imperial Valley, rejecting MWD’s argument that the Water Authority’s transfer supplies were actually purchases of MWD water that should therefore be excluded from the calculation of preferential rights. A correct calculation of the Water Authority’s preferential rights translates to the availability of tens of thousands of acre-feet of more water per year for the San Diego region, a significant increase in supplies.

Earlier – in April 2014 – Judge Karnow ruled that MWD’s 2011-2014 rates violated California statutes and common law that require public water agencies to limit the rates they charge to the costs of providing their services. He also ruled that MWD’s 2013 and 2014 rates violated Proposition 26, passed by California voters in November 2010 and now enshrined in Articles 13A and 13C of the California Constitution. Proposition 26 shifted the burden to public agencies to prove they are not charging more than the actual cost of the services they provide.

Additional information about the case, including the final judgment and peremptory writ of mandate, is posted at www.sdcwa.org/mwdrate-challenge.

Litigation background

The Water Authority’s lawsuits stem from historic agreements the agency signed in 2003 to secure independent sources of water from the Colorado River and reduce the San Diego region’s once near-total reliance on MWD for water. To transport its Colorado River water supplies to San Diego County, the Water Authority must use pipelines controlled by MWD, which has a monopoly on imported water distribution facilities in Southern California.

MWD’s current rates were expressly designed to protect its monopoly and to discriminate against the Water Authority by shifting unrelated water supply costs onto transportation rates, while illegally subsidizing MWD’s water supply rate to the benefit of its 25 other member agencies. The Water Authority filed its first rate lawsuit against MWD in 2010, then filed a second suit in 2012 because MWD refused to reform its rates, which effectively force San Diego County ratepayers to subsidize water ratepayers in other parts of Southern California. The two cases were coordinated for trial, with the main issues being broken into two phases of hearings.

Attorneys for the Water Authority argued in the December 2013 Phase 1 trial that MWD had loaded unrelated costs onto the rate it charges for transporting water – a scheme that disproportionately damages San Diego County ratepayers because the Water Authority is the only water agency that uses MWD’s transportation service (also known as “wheeling”) to move large volumes of supplies purchased from sources independent of MWD.

MWD asserted in court that it can set rates without regard to the actual costs of service, and that it can even collect more than the costs of the services it provides, as long as a majority of its board votes for it. MWD also contended in court that it was exempt from Proposition 26, as well as other constitutional and statutory provisions of California law.

On April 24, 2014, Judge Karnow issued a final statement of decision in Phase 1 of the trial that said MWD violated cost-of-service requirements in California’s statutes and common law when setting rates for 2011, 2012, 2013 and 2014. He also said MWD’s 2013 and 2014 rates violate Proposition 26, approved by voters in November 2010 and embodied in the California Constitution as Article 13C. Proposition 26 shifted the burden to public agencies to prove they are not charging more than the actual cost of the services they provide.

After the April 2014 ruling, the Water Authority was forced to file another lawsuit because MWD set its rates for 2015 and 2016 using the same methodology and cost allocation declared by the court to be illegal. That case has been stayed by stipulation of the parties pending the final outcome of the current cases.

The San Diego County Water Authority is a public agency serving the San Diego region as a wholesale supplier of water from the Colorado River and Northern California. The Water Authority works through its 24 member agencies to provide a safe, reliable water supply to support the region’s $218 billion economy and the quality of life of 3.2 million residents.

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