News Release

Judge Rules Prop. 26 does not Apply to 2010 Lawsuit Challenging MWD’s Rates

But court affirms that the test for liability remains the same -- whether MWD’s rates are reasonably related to the cost of service
March 30, 2013

The San Francisco Superior Court has affirmed the San Diego County Water Authority’s key legal arguments despite ruling Friday that Proposition 26 does not apply to the Water Authority’s 2010 lawsuit over rates charged by the Los Angeles-based Metropolitan Water District of Southern California.

Judge Curtis E.A. Karnow ruled that because MWD’s rates in that case were adopted before the passage of Proposition 26 in November 2010, Proposition 26 does not apply to MWD’s water rates set in April 2010.  But Judge Karnow confirmed the primary basis of the Water Authority’s lawsuit: that Proposition 26 did not substantively change the law that already applied to MWD, requiring MWD to set rates consistent with the costs it incurs in providing its services.  In court briefs, MWD argued that it could set whatever rates it wanted, even if those rates overcharged ratepayers by far exceeding the agency’s actual costs.

State voters passed Proposition 26 to protect all Californians, including water ratepayers, from hidden taxes. Despite Judge Karnow’s ruling, Proposition 26 will remain an important issue because the Water Authority also has alleged MWD violated Proposition 26 in a related 2012 lawsuit contesting MWD’s 2013 and 2014 rates. The Proposition 26 claim in that case was not challenged in MWD’s motion nor addressed by Judge Karnow on Friday.  MWD adopted its 2013 and 2014 rates in April 2012, 17 months after voters approved Proposition 26.

“Although we are disappointed that the court has ruled that Proposition 26 doesn’t apply to the 2010 case, there is no question that Proposition 26 applies in the lawsuit that challenges MWD’s 2013 and 2014 rates,” said Daniel Purcell, special counsel for the Water Authority, with the law firm of Keker & Van Nest in San Francisco.  “We’re happy that Judge Karnow recognized that there are numerous other provisions of California law that require MWD to set rates consistent with its costs that still do apply to MWD’s 2011 and 2012 rates.

“MWD’s rates for 2011 through 2014 will still stand or fall on whether MWD has complied with cost-of-service requirements, and MWD still will bear the burden of proving its 2013 and 2014 rates comply with the law,” Purcell said. “MWD has already admitted it does not pay attention to its costs when it sets its rates, so this is a battle MWD will not be able to win.

“MWD sees the writing on the wall, because in bringing this motion, MWD offered the radical argument that it is literally above the law and can set whatever rates it wants, regardless of whether those rates are related to MWD’s costs,” Purcell said. “In other words, MWD thinks that, if it wanted to, it could force ratepayers to pay 10 or 15 or 100 times the money MWD is paying in costs.  There isn’t any legal basis for that, and nothing in the Court’s ruling today supports that sort of radical proposition.  Numerous provisions of California law, not just Proposition 26, require agencies to charge rates no greater than necessary to cover costs.”

The Water Authority’s two lawsuits against MWD present common factual and legal elements. The first challenge was filed in June 2010, after MWD set its 2011 and 2012 rates. The Water Authority filed a second complaint in June 2012, after MWD set rates for 2013 and 2014 that were based on the same flawed cost-of-service methodology as the first action. The second lawsuit was necessary partly because MWD’s delays in the first lawsuit slowed its resolution. The court agreed to coordinate the cases for case-management purposes.

Each lawsuit asserts that MWD’s rates assign water supply costs to transportation rates in violation of state law and the state constitution. Both cases also allege that the water rates set by MWD discriminate against the Water Authority by artificially inflating the price charged for “wheeling” (or transporting) water through MWD’s pipes if it is purchased from a water supplier other than MWD.

Under long-term agreements ranging from 45 to 110 years, the Water Authority purchases water from the Imperial Irrigation District and receives other independent water supplies from relining the All-American and Coachella canals. The Water Authority is the only MWD member agency that uses the pipelines MWD controls to transport a large volume of independent third-party water each year.

Under MWD’s current rate scheme, San Diego County water ratepayers will be overcharged for water transportation services this year by $57 million. By 2021, the overcharges could grow to more than $217 million annually.

Judge Karnow has tentatively scheduled both cases for trial in November.

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