Adoption of Illegal MWD Rates Forces Fourth Water Authority Lawsuit

Short Title
Adoption of Illegal MWD Rates Forces Fourth Water Authority Lawsuit
MWD Board ignores court order to set rates based on state law
April 13, 2016

The San Diego County Water Authority today filed its fourth lawsuit against the Los Angeles-based Metropolitan Water District of Southern California, alleging that MWD’s newly adopted rates for 2017 and 2018 violate California law, the state Constitution and common law that all require rates to be set based upon cost of service. MWD adopted the rates at its Tuesday, April 12 meeting.

A Superior Court judge ruled in November 2015 that MWD’s rates for 2011-2014 were illegal. The judge directed MWD to pay the Water Authority more than $243 million in damages, costs, pre-judgment interest and attorneys’ fees. (Post-judgment interest is expected to grow the total to more than $275 million over two years.)

In his November ruling, the judge also ordered MWD to only set legal rates in future years.

Ignoring the judge’s ruling and order to set only lawful rates, MWD's board of directors approved rates and charges for 2017 and 2018 on April 12 using the same illegal methodology that it used in 2011-2014.

MWD’s overcharges of the Water Authority for 2017 and 2018 are expected to be more than $134 million, and overcharges for the eight years contested by the Water Authority are approximately $524 million (not counting the interest, court costs and attorney’s fees from 2015-2018) . If allowed to stand, overcharges by MWD could exceed $2 billion over 20 years.

“We don’t relish the prospect of more litigation, but MWD’s repeated refusal to follow the law damages San Diego County ratepayers and cannot be allowed to stand,” said Mark Weston, chair of the Water Authority’s Board of Directors. “The Water Authority has prevailed on the merits of two similar cases and we intend to continue challenging MWD’s rates as long as MWD tries to operate outside the law.”

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. A third Water Authority lawsuit, filed in 2014, challenged MWD rates in 2015 and 2016 is currently stayed pending resolution of MWD’s appeal from the first two lawsuits.

On November 18, 2015, Judge Curtis E.A. Karnow issued a final judgment in the 2011-2012 and 2013-2014 cases that:

  • Invalidated MWD’s transportation rates for 2011-2014, finding that they violated numerous provisions of California law and the state Constitution (2013-14 only);
  • Ordered MWD to pay the Water Authority $188.3 million in damages and  $46.6 million in prejudgment interest; and
  • Ordered MWD to recalculate the Water Authority’s statutory right to MWD water supply – a right MWD had illegally under-calculated by tens of thousands of acre-feet annually for more than a decade.

Judge Karnow also mandated that MWD: “Enact only legal transportation and wheeling rates in the future” and “set its rates based upon cost causation – that is, Met must charge for its services based only on what it costs to provide them.”

MWD is appealing Judge Karnow’s final judgment. That process is expected to continue for at least another year and will delay MWD’s payment of the Water Authority’s judgment. The Water Authority’s Board of Directors has already determined that any money returned to the Water Authority will be refunded to its 24 member agencies in proportion to their payment of MWD’s illegal overcharges over the years in dispute, after deducting any litigation expenses that are not recovered. 

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

Additional information about the case, including the lawsuit over 2017 and 2018 rates, is 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.

In August 2015, following the Phase 2 trial on the Water Authority’s breach of contract and preferential rights claims, 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. Instead, he said the Water Authority is entitled to the contract damages it claimed – four years of overpayments totaling $188.3 million, plus interest.

Judge Karnow also ruled in August 2015 that MWD’s interpretation of a statutory water rights formula (known as “preferential rights”) 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.

In November 2015, the final judgment by Judge Curtis E.A. Karnow combined rulings he issued in 2014 and 2015.