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Final Ruling: Water Authority Wins Landmark Rate Litigation Against Metropolitan Water District
Water Authority Board authorizes lawsuit challenging MWD’s rates for 2015 and 2016
April 25, 2014
A final court ruling issued late Thursday afternoon says the San Diego County Water Authority has prevailed in the first phase of historic rate litigation against the Metropolitan Water District of Southern California. The statement of decision by San Francisco County Superior Court Judge Curtis E. A. Karnow affirmed his Feb. 25 tentative ruling in the Water Authority’s favor.
The litigation could save the San Diego region $2 billion in overcharges created by MWD’s illegal rates over 45 years.
Judge Karnow determined that MWD violated cost of service requirements of California’s Constitution, statutes and common law when setting rates for 2011, 2012, 2013 and 2014. Specifically, he said MWD’s rates violate California’s wheeling statute, Government Code section 54999.7(a), and common law that apply to ratemaking. He also said MWD’s 2013 and 2014 rates violate Proposition 26, approved by voters in November 2010 and now 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.
The judge on Thursday also set a case management conference for May 16 to schedule the second phase of the trial on the Water Authority’s claims based on breach of contract and preferential rights.
“Today’s decision seals our victory in this pivotal phase of the litigation,” said Thomas V. Wornham, Chair of the Water Authority’s Board of Directors. “There’s still a long road ahead, but such a strong validation of our efforts only enhances our determination to continue this fight on behalf of San Diego County ratepayers.
“It’s a tribute to this region that our community partners have stood shoulder-to-shoulder with us for the past four years,” Wornham said. “With their unwavering support, we have achieved a momentous win that should benefit San Diego County for generations to come.”
During its regular monthly meeting on Thursday, the Water Authority’s Board voted unanimously to authorize another lawsuit against MWD over rates it adopted on April 8 for 2015 and 2016 using the same illegal methodology it used the prior four years. Allowed to stand, MWD’s rates for 2015 and 2016 alone will overcharge San Diego County ratepayers by $92 million.
The new lawsuit is necessary because MWD did not change its rates or cost allocation methodology after Judge Karnow’s tentative ruling invalidating the rates. Applicable statutes of limitations give the Water Authority only 60 days from when MWD adopted its rates to file a lawsuit.
MWD’s current rates were expressly designed to protect the agency’s 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. MWD asserted in court it can set its 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. Judge Karnow’s ruling disagreed.
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 during a five-day trial in December 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 largest user of MWD’s transportation service (also known as “wheeling”).
Said Judge Karnow in his statement of decision:
“There is no substantial evidence in the record to support Met’s inclusion in its transportation rates … of 100% of (1) the sums it pays to the California Department of Water Resources’ (State Water Project) disaggregated by the SWP as for transportation of that purchased water; and (2) the costs for conservation and local water supply development programs recovered through the Water Stewardship Rate. Indeed, the record confirms that these rates over-collect from wheelers, because at least a significant portion of these costs are attributable to supply, not transportation. These rates – the System Access Rate, System Power Rate, Water Stewardship Rate, and Met’s wheeling rate – therefore violate Proposition 26 (2013-14 rates only), the Wheeling statute, Govt. Code § 54999.7(a), and the common law. The Court invalidates each rate for both the 2011-2012 and 2013-2014 rate cycles.”
“We’ve said all along that MWD is not above the law,” said Maureen Stapleton, general manager of the Water Authority. “I hope that Met’s board of directors listens to a judge saying the same thing and conducts a real, independent cost-of-service study and sets rates that comply with the law.”
Phase 2 of the trial is expected to determine the disposition of tens of millions of dollars in disputed payments the Water Authority has made since 2011. Should the court award a refund to the Water Authority, the agency will deduct its litigation expenses and return the remaining money to its 24 member agencies in proportion to their past payment of MWD’s illegal overcharges.
The Water Authority’s lawsuits stem from historic agreements the agency signed a decade ago 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 these 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. The Water Authority is the only MWD member agency that uses the pipelines MWD controls to transport a large volume of third-party water supplies each year.
For more information about the Water Authority’s lawsuits, including Thursday’s statement of decision, go to www.sdcwa.org/mwdrate-challenge.