Judge Awards $8.9 Million in Attorneys’ Fees to Water Authority in MWD Rate Case

Short Title
Judge Awards $8.9 Million in Attorneys’ Fees to Water Authority
MWD’s damages, interest, costs and attorneys’ fees top $243 million as agency prepares to adopt more illegal rates
March 28, 2016

After losing a landmark judgment in 2015, the Metropolitan Water District of Southern California must pay $8.9 million in attorneys’ fees to the San Diego County Water Authority, a San Francisco Superior Court judge ruled Thursday. As the prevailing party, the Water Authority is entitled to its attorneys’ fees, according to the court order; a previous decision awarded the Water Authority more than $320,000 in court costs.

MWD now owes the Water Authority more than $243 million, including damages, costs, interest and attorneys’ fees. The bill, including the award of attorneys’ fees, accrues simple interest of 7 percent annually. 

Records disclosed by MWD show that it has spent more than $20 million on its attorney’s fees. 

“We are pleased that almost all of the attorneys’ fees and court costs incurred by the Water Authority to defend our water ratepayers will be recovered,” said Mark Weston, chair of the Water Authority’s Board of Directors.  “But at the same time, it is greatly alarming to us that MWD continues to ignore the court’s rulings and overcharge San Diego County ratepayers by setting rates using the same flawed rate allocation that the judge found to be illegal.”

Despite the court’s ruling in two cases spanning four years of MWD’s rates – 2011-2014 – MWD is poised to adopt two more years of illegal rates – for 2017 and 2018 – at its April 12, 2016, board meeting. The Water Authority filed suit challenging MWD’s 2015 and 2016 rates, which also use the same illegal rate allocation. That case – which raises the same issues – has been stayed pending the outcome of appeals on the prior two cases.

“MWD has a clear obligation to set rates that conform to state law and the California Constitution,” said Dan Purcell, special counsel for the Water Authority with Keker & Van Nest, San Francisco. “The law requires it, a judge has ordered it, and the ratepayers of San Diego County deserve it.”

The award of attorneys’ fees by Judge Curtis E.A. Karnow follows his final judgment in November 2015 that affirmed victories by the Water Authority in both phases of two landmark lawsuits challenging MWD’s rates. Karnow:

  • Invalidated MWD’s transportation rates for 2011-2014, finding that they violated numerous provisions of California law and the state Constitution;
  • 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.

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 Karnow’s final judgment. That process is expected to continue for at least another year and will significantly delay 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 four 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 November 2015 final judgment and peremptory writ of mandate, 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, 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 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 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.