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Landmark Trial Over MWD’s Rates Concludes in Superior Court
Billions of dollars hang in the balance; decision expected in 2014
December 23, 2013
Lawyers for the San Diego County Water Authority on Monday wrapped up their case against the Los Angeles-based Metropolitan Water District of Southern California, concluding a five-day trial with more than $2 billion at stake for county residents. Judge Curtis E. A. Karnow requested post-trial briefs from both parties by Jan. 17, with a hearing on those briefs scheduled for Jan. 23. Following the Jan. 23 hearing, Judge Karnow will take the matter under submission before issuing his decision.
Over the five-day trial in San Francisco Superior Court, the Water Authority’s attorneys presented reams of evidence and witness testimony that proved MWD’s rates artificially inflate the cost of its water transportation services by improperly including unrelated expenses. Numerous California statutes, the California Constitution and common law all require that public agencies such as MWD base their rates on the actual costs of the services provided.
MWD’s rates – challenged in two lawsuits that were coordinated for trial – overcharge the San Diego County Water Authority, which relies on MWD to transfer large volumes of independent water supplies from the Colorado River. Other MWD member agencies benefit from corresponding undercharges, which totaled $57 million this year and are projected to reach $217 million annually by 2021.
“There aren’t any seriously disputed facts in these cases; there is a serious dispute about whether Metropolitan can set rates any way it wants,” said John W. Keker, special counsel for the Water Authority with the law firm of Keker & Van Nest in San Francisco. “Over the past five days of hearings, we have conclusively shown that MWD set rates to preserve its revenues, and that is flatly illegal. We believe the judge will direct MWD to reformulate its rates consistent with what the people of California have long demanded – that public agencies set their rates no higher than needed to cover the costs for each service.”
The first phase of the trial focused on the Water Authority’s challenges to MWD’s rates for 2011 through 2014. A second, yet-to-be-scheduled phase of the trial would address the Water Authority’s claim that MWD miscalculates San Diego County’s preferential rights to MWD water, which are particularly important during shortage allocations. It would also include the Water Authority’s claim that MWD breached the contract it signed with the Water Authority in 2003 promising to charge only lawful rates for transporting its Colorado River water.
The litigation stems from historic agreements the Water Authority signed a decade ago to secure independent sources of water from the Colorado River and reduce its 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. MWD’s current rates were designed to protect MWD’s monopoly and to discriminate against the Water Authority by shifting water supply costs to transportation rates.
“The outcome of this litigation is of critical importance to our ratepayers and San Diego County's $188 billion economy,” said Maureen A. Stapleton, general manager of the Water Authority. “Lawsuits are our last resort, but when MWD refused to comply with the law, we were forced into court to protect our ratepayers and our economy.
“We thank our region's elected officials, business groups, civic organizations and other public agencies that have stood with us throughout this case,” Stapleton said.
The Water Authority first sued MWD in June 2010, and then filed another lawsuit in June 2012 because the 2010 case had not been resolved and MWD had adopted rates for 2013 and 2014 based on its same flawed misallocation. In both lawsuits, the Water Authority asserts that MWD illegally assigns unrelated water supply costs – including its costs of obtaining water from the state of California and its costs of subsidizing local water supply projects – to MWD’s water transportation rates.
MWD said 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 argued that it is exempt from Proposition 26, a voter-approved initiative in November 2010 that amended the California Constitution. Proposition 26 shifted the burden to public agencies to prove their rates are no more than the actual cost of the services they provide.
In September 2013, Judge Karnow rejected MWD’s attempt to legally exempt its 2013 and 2014 rates from Proposition 26 without trial by ruling that he will decide the issue based on the facts presented at trial. Judge Karnow ruled earlier this year that Proposition 26 is not retroactive, and therefore does not apply to the rates MWD adopted in April 2010 for 2011 and 2012.
For more information about the Water Authority’s lawsuits, go to www.sdcwa.org/mwdrate-challenge.