News Release

Court Denies MWD Motion Seeking to Exempt its Rates from Proposition 26

Rejects MWD’s argument that rates are immune from cost-of-service requirements in California’s Constitution
More information

For more information about the Water Authority’s lawsuits against unlawful rates and charges levied by MWD, go to www.sdcwa.org/mwdrate-challenge.

Read Judge Karnow’s order on Proposition 26 here.

September 20, 2013

A San Francisco Superior Court judge on Friday rejected an attempt by the Los Angeles-based Metropolitan Water District of Southern California to exempt its water rates from a voter-approved measure designed to protect ratepayers from hidden taxes.

Two days after hearing arguments on the motion, Judge Curtis E.A. Karnow ruled that MWD’s rates for 2013 and 2014 may be subject to Proposition 26, passed by voters in November 2010. It requires government agencies to show that the rates they charge do not exceed the cost of the services being provided. Proposition 26 also placed the burden on local governments such as MWD to prove that the costs allocated to each of their member agencies bear a fair or reasonable relationship to each member agency’s benefits from the governmental activity. Proposition 26 is now embodied in California’s Constitution in Section XIII C. 

In his order denying MWD’s motion to kick Proposition 26 out of the case, Judge Karnow said he will decide whether or not MWD’s rates must comply with Proposition 26 when the case goes to trial December 17.  In his order, Judge Karnow wrote:

“Nor do I think it is wise, as a matter of discretion, to eliminate the Proposition 26 issues without reviewing the evidence for other claims in this case.  On the merits, it is likely that very similar issues are at stake whether the case turns on Proposition 26 or the other bases presented by the parties, in that at trial I will review the evidence that Metropolitan’s rates bore an appropriate relationship to its costs.”

MWD is trying to dodge Proposition 26, arguing that even though it holds a monopoly on the distribution of water in Southern California, it is nothing more than a “voluntary collective” whose member agencies pay its rates "voluntarily." MWD also asserted that even if it were subject to Proposition 26, its rates are merely fees for  “entrance to or use of government property,” a category that MWD argued falls outside the measure’s cost-of-service requirements. Finally, MWD took the position that any constitutional violation it has committed was cured because MWD’s own board of directors – rather than voters – comprised the “electorate” and it approved the rates by a two-thirds majority.  In other words, MWD – a government agency that provides water to 18 million Californians – argued that it could set rates without any accountability to the public. Judge Karnow analyzed and preliminarily rejected all three arguments.

“This is the first step toward what we intend to prove at trial: that Proposition 26 protects water ratepayers throughout Southern California and the entire state by ensuring that they are not being charged more than the actual cost of government services,” said Daniel Purcell, special counsel for the Water Authority with the law firm of Keker & Van Nest in San Francisco. “MWD fought hard to avoid the clear will of the voters. But as the court made clear in its order, MWD’s arguments don’t have any factual basis. There is no reason MWD has to overcharge ratepayers in order to conduct its business."

The Water Authority sued MWD in 2010 for adopting illegal rates that are not based on the costs of providing the services for which they are collected. The Water Authority was forced to file another lawsuit in 2012 because the 2010 case had not been resolved and MWD had adopted rates for 2013 and 2014 based on its same flawed process.  Numerous California statutes, the California Constitution and common law all require that public agencies such as MWD set rates based on the actual costs of the services they are providing.

The majority of the claims in the Water Authority’s two lawsuits against MWD are scheduled for a coordinated trial starting December 17; a trial of the Water Authority’s breach of contract claim will follow at a later date. In March, Judge Karnow ruled that Proposition 26 could not apply retroactively to MWD’s water rates set in April 2010, before voters approved the ballot measure.

In both cases, the Water Authority asserts that MWD assigns water supply costs – including its costs of obtaining water from the State of California and its costs of funding local supply development projects – to MWD’s water transportation rates in violation of state law, the state constitution and common law. The lawsuits also allege, among other things, that MWD’s rates discriminate against the Water Authority by artificially inflating the price MWD charges for transporting the Water Authority’s independent Colorado River water supplies through MWD’s pipelines.

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

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