Escondido, CA

Court awards $188.3 million plus interest to Water Authority: Local customers may someday see lower rates

July 15, a San Francisco Superior Court judge ruled in a tentative decision that he would require the Metropolitan Water District of Southern California to pay the San Diego County Water Authority $188.3 million plus interest for illegal water rates MWD charged from 2011 to 2014.

“San Diego has proven by a preponderance of the evidence that it was in fact damaged by paying conveyance rates that were higher than Met could have set pursuant to applicable law and regulation,” Judge Curtis E.A. Karnow wrote in the tentative decision. And later, Karnow said, “each time Met sets unlawful conveyance rates, it breached its obligations.”

If the court decision is upheld on appeal, which will probably take years, Escondido and Valley Center customers, in fact all San Diego customers, could see their rates cut to reflect the fact that the MWD has overcharged them for more than a decade.

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 enshrined in Articles 13A and 13C of the California Constitution. Proposition 26 shifted the burden to public agencies to prove they are not charg- ing more than the actual cost of the services they provide. Judge Karnow invalidated MWD’s 2011-2014 rates because they violated all these provisions of law.

In the July 15 ruling Judge Karnow tentatively 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 Angelesbased wholesaler. Instead, he said the Water Authority was entitled to damages it claimed – four years of overpayments at approximately $188 million, plus interest. If allowed to stand, MWD’s overcharges could have exceeded $2 billion over 45 years.

“This decision is a major victory for the San Diego region – not just the Water Authority, but our many partners who have supported this rate case from the start,” said Mark Weston, chairman of the Water Authority’s Board of Directors.

“Judge Karnow’s tentative award is a clear signal that MWD has been living outside the law and will need to reform its rates going forward. Over decades, this ruling will save San Diego County ratepayers billions of dollars.”

In another pivotal tentative ruling, Judge Karnow said MWD has been under calculating the Water Authority’s preferential right to MWD water supplies. In MWD’s water rights formula, it has improperly excluded hundreds of millions of dollars of payments by the Water Authority for transporting the Water Authority’s independent Colorado River water supplies.

Greg Thomas, general manager of Rincon Del Diablo Municipal Water District, which serves Greater Escondido told the Times Advocate that “we are very pleased with the recent decision by Judge Karnow on the SDCWA versus MWD rate case. “This decision will return money that was overcharged by MWD of the SDCWA and its member agencies, and hopefully force MWD to change their illegal water rate methodology, as this is not an isolated incident. Our ratepayers deserve to be charged legal rates from the wholesaler and full entitlement to their water supplies.”

Gary Arant, general manager of the Valley Center Municipal Water District, explained the ruling from a local perspective. “Past calculations have shown that VCMWD will see about 2.4 percent of the total settlement. Based upon our water purchases during periods covered by the litigation, we will be looking at something like $4.5 million in a rate refund from MWD through the SDCWA. We would also expect to see a decrease in the wholesale rate going forward, but we don’t know how much at this time.”

Arant explained, “Like everything with water, this is very complicated. The Reader’s Digest version is that since 2010, MWD has been overcharging the SDCWA to move the Authority‘ s IID (Imperial Irrigation District) Transfer Water and Canal Lining Water through the MWD system.”

The first suit was filed in 2010, a second suit in 2012, and third in 2014, challenging the rates adopted for 2015-2016. The judge in San Francisco agreed with the SDCWA and has awarded $188 million in damages for the 2010 and 2012 suits with the 2014 suit on hold.

“The trial court decision will be appealed by MWD, so we don’t expect to see any outcome money-wise for at least three years,” said Arant. “When the refund finally comes through, our board will decide what to do with the money at that time.”

By law, each MWD member agency is entitled to a percentage of MWD’s available water supplies at any time based upon all payments made to MWD throughout history – “excepting the purchase of water.” The court tentatively 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 from lining the All American and Coachella canals in the Imperial Valley. The court rejected MWD’s argument that the Water Authority’s transfer supplies were purchases of MWD water excluded from the calculation of preferential rights.

A final ruling by Judge Karnow is expected in about a month.

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.

MWD has already said it will appeal, a move that would delay refunding of the Water Authority’s overpayments. “We obviously don’t agree with MWD’s strategy to waste more money defending a flawed and illegal rate scheme,” Weston said. “The ratepayers of San Diego County deserve not only legal rates but also their legal entitlement to MWD’s water supplies.”

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.

According to the Authority’s lawsuit, 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 forced 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,” says the Authority.

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 dis- proportionately 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.

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