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MWD Rate Challenges
What is the Latest?
Court Denies MWD Motion Seeking to Exempt its Rates from Proposition 26
Water Authority Seeks Pre-Trial Decision
A San Francisco Superior Court judge 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.
Judge Curtis E.A. Karnow ruled on September 20 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. To read the judge’s order, click here.
Also on September 20, the Water Authority filed a motion for summary judgment, asking the court to declare illegal and unenforceable contract language used by MWD to punish the Water Authority for challenging the legality of MWD’s water rates.
A hearing has been scheduled for December 3 to hear the Water Authority’s motion and any motions for summary judgment MWD may file.
MWD developed its so-called “Rate Structure Integrity” contract clause, or “RSI,” so that it could terminate and bar future participation in MWD subsidy programs that fund local water supply development and conservation programs in retaliation against any MWD member agency that exercises its First Amendment right to challenge MWD’s rates in court or lobbies the Legislature to change them. In its motion, the Water Authority is asking the court to declare the provision illegal, and issue an order prohibiting MWD from enforcing the illegal contract provision. Even if MWD loses the underlying rate litigation, the RSI clause would remain in effect, according to MWD.
After the Water Authority filed a lawsuit in 2010 challenging MWD’s water rates, MWD invoked the RSI clause in June 2011 to punish the Water Authority. Since that time, MWD has charged San Diego County water ratepayers approximately $35 million to help fund local water supply and conservation projects and programs in other parts of Southern California, while barring the Water Authority from receiving any of those funds for projects and programs in San Diego County. Instead, MWD redistributes the money paid by San Diego ratepayers to pay for projects in Los Angeles, Orange, Ventura, San Bernardino and Riverside counties. Since barring the Water Authority from participating in these programs more than two years ago, MWD’s board has approved 13 new local supply projects in other parts of its service area.
MWD has also used the RSI clause as the basis for canceling several Water Authority agreements, including a $1.3 million agreement to increase water recycling in Ramona, a $1.1 million agreement to increase water use efficiency through landscape retrofits and training for homeowners and about $800,000 annually for other local programs to increase water use efficiency. The MWD board also directed its staff to bar the Water Authority from participating in any future MWD programs to help fund local supply development projects in San Diego County.
The Water Authority’s motion asks only for a declaration that the RSI clause is illegal and unenforceable; the issue of damages to the Water Authority will be decided later, at trial.
The Water Authority sued MWD in 2010 and again in 2012 for imposing illegal rates and was forced to file a second lawsuit in 2012 because the 2010 case had not yet been heard. Numerous California statutes, the California Constitution and common law all require that public water agencies such as MWD set rates based on the actual costs of the services they are providing.
Under MWD’s current rates – which fail to meet statutory and constitutional requirements or follow basic industry standards – 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.
Two decades ago, almost all of San Diego County’s water needs were met by a single supplier – the Los Angeles-based Metropolitan Water District of Southern California. In 1991, after a multi-year drought severely limited water supplies, MWD cut water deliveries 30 percent to the San Diego region, severely impacted the local economy and quality of life. Delivery cuts of 50 percent were only averted by “Miracle March” rains. The Water Authority Board then set forth a course to develop a supply diversification strategy to ensure that the region was never again dependent on a single supplier for nearly all of its water.
The cornerstone of this diversification strategy is a set of historic agreements the Water Authority signed in 2003 to secure its own sources of water from the Colorado River. 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. In order to get this water to San Diego County, the Water Authority uses pipelines that are controlled by MWD.
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 Misallocation of Costs
The Water Authority believes that MWD is overcharging to transport this water and is using that money to subsidize the cost of water MWD sells to its member agencies. This practice violates the California Constitution, other state law and standard water utility practice.
About half of MWD's supplies come from its purchases from the State Water Project under a supply contract with the Department of Water Resources. Instead of treating these purchases as a cost of water, MWD allocates nearly 80 percent of the cost to charges it imposes for the transportation of the Water Authority's water through MWD facilities - even though MWD does not own the state system, and not a drop of Water Authority's own Colorado River water supplies touches that system. This discriminates against the Water Authority, which is the single largest user of MWD transportation services. The Water Authority uses MWD facilities to transport Colorado River water it purchases under a water conservation agreement with the Imperial Irrigation District, and also from lining sections of the All-American and Coachella Canals.
impact of MWD Overcharges to Water Authority Ratepayers*
Financial Impacts to San Diego County Ratepayers
MWD’s illegal rates cause significant financial harm to the San Diego region. The overcharges may grow to as much as $217 million annually as the Water Authority’s independent Colorado River supplies reach their peak in 2021. Collectively, these overcharges could amount to $2.1 billion over the life of the agreements.
In 2010, after years of trying to work with MWD to resolve concerns with MWD’s-rate setting practices, the Water Authority filed a lawsuit against MWD for its 2011 and 2012 rates. The Water Authority filed a second suit 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 because MWD’s delays in the first lawsuit slowed its resolution.
The Water Authority’s two lawsuits against MWD present common factual and legal elements. 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.
Why are MWD’s Rates Illegal?
MWD is legally required to charge rates that are reasonably related to the costs of services provided and reasonably allocated among its member agencies according to the benefit they receive from particular services. The Water Authority’s lawsuit claims MWD is improperly charging hundreds of millions of dollars in water supply costs to its System Access Rate, System Power Rate and Water Stewardship Rate. These three rate components comprise MWD’s transportation Rate.
The lawsuits allege:
Range of MWD Overcharges in 2021
- MWD’s rates misallocate MWD’s “supply” costs by characterizing the water MWD purchases under its contract with the State Water Project as “transportation” when in fact MWD does not own or operate any of the facilities that deliver State Water Project water to Metropolitan. The State of California owns and operates those facilities.
- MWD’s rates misallocate MWD’s “supply” costs by characterizing its subsidy investments in water conservation and local water supply projects, such as recycled water and seawater desalination, as “transportation” costs.
- At the urging of self-interested member agencies, MWD’s board has set invalid rates without taking into account where the costs should be properly allocated. MWD is not following clear industry standards or California law.
- MWD’s illegal rates breach a 2003 contract with the Water Authority in which MWD promised to charge the Water Authority for water transportation services in accordance with state law.
- MWD’s imposition of a retaliatory contract provision designed to prevent the Water Authority from challenging MWD’s unlawful rates in court.
- The 2012 lawsuit additionally alleges that MWD violated Proposition 26, a voter-approved measure passed in November 2011. Prop. 26 aims to prevent public agencies from passing hidden taxes by ensuring that rate increases are tied to cost of service.
- In its 2012 lawsuit, the Water Authority is also seeking to address another major flaw in MWD’s rates: MWD has failed to properly recover tens of millions of dollars annually in operational and other costs it incurs as a “standby” supplier for member agencies whose water demands vary greatly from year to year. MWD has not performed adequate studies or calculated the costs of purchasing, storing and delivering water supplies to meet the varying annual needs of its member agencies. Instead, MWD misallocates many of these costs to its other rates. MWD's current rate structure is akin to allowing member agencies getting the insurance benefits, without ever paying for the service. This practice forces steady MWD customers, such as the Water Authority, to pay a disproportionate share of the costs of providing this stand-by service. The annual benefit is estimated at $40 million, just for the city of Los Angeles, which has historically altered its purchases of MWD water by more than 200,000 acre-feet from one year to the next.
A Superior Court judge agreed to coordinate the Water Authority’s two lawsuits, (one challenging the 2011 and 2012 rates and the second for the 2013 and 2014 rates). This approach will allow for more efficient preparations for trial while letting the judge make separate rulings in each case. The trial date in both lawsuits hs been set to begin on December 17, 2013.