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MWD Rate Challenges
What is the Latest?
A final judgment entered in San Francisco Superior Court on Nov. 18, affirms victories by the San Diego County Water Authority in both phases of two landmark lawsuits challenging rates set by the Metropolitan Water District of Southern California. The judgment also orders MWD to recalculate the Water Authority’s statutory right to MWD water supply – a right MWD had illegally under-calculated for more than a decade.
The final judgment by Judge Curtis E.A. Karnow combines rulings he issued in 2014 and 2015. Key elements of the judgment are: the invalidation of MWD’s unlawful transportation rates for 2011-2014; an order directing MWD to pay the Water Authority $188.3 million in contract damages; and a finding that MWD has under-calculated the Water Authority’s right to MWD water by tens of thousands of acre-feet of water per year.
In addition, the judge said MWD owes the Water Authority $46.6 million in prejudgment interest, for a total judgment of nearly $235 million. That amount will accrue simple post-judgment interest of 7 percent annually, meaning the total amount due to the Water Authority will grow by $45,000 per day – or $16.4 million per year – until MWD pays what it owes to the Water Authority.
The judgment completes the trial court phase of lawsuits that were filed in 2010 and 2012 and have been vigorously contested in both the courtroom and the MWD board room.
In another major ruling on Nov. 18, Judge Karnow issued a peremptory writ of mandate that, going forward, commands MWD to:
- “Enact only legal transportation and wheeling rates in the future, and specifically, not to do the things this Court held were illegal and/or unconstitutional in the Court’s April 24, 2014 Statement of Decision….”
- “…henceforth set its rates based upon cost causation – that is, Met must charge for its services based only on what it costs to provide them.”
- “…not… include in its future transportation or wheeling rates costs that are not attributable to Met’s own conveyance system or to its actual costs in conveying water.”
- “…allocate its costs associated with local water supply development, water reclamation, desalination and conservation programs to Met’s rates and charges based on cost causation. The costs of such programs may be included in Met’s wheeling rate only to the extent that the costs of transporting wheeled (i.e. non-Met) water are a function of the costs of such programs.”
On his order barring MWD from including in its future transportation or wheeling rates costs that are not attributable to MWD’s own conveyance system, Judge Karnow explicitly ruled that:
“Met does not own or operate the State Water Project (SWP) or the SWP transportation facilities, nor does Met transport SWP water from Northern California to the terminal reservoirs at Castaic Lake and Lake Perris. The SWP is not part of Met’s conveyance system, and the SWP conveyance facilities are not a part of Met’s conveyance facilities.”
This is a very significant aspect of the ruling because MWD claimed throughout the trial that the separately owned and operated California Department of Water Resources’ State Water Project facilities were actually part of MWD’s own conveyance system and thus could be treated as an MWD “transportation” cost. MWD’s State Water Project costs constitute the largest share of costs that the Court held were improperly charged by MWD to the Water Authority for transporting the Water Authority’s independent Colorado River supplies.
In addition, as part of the judgment, Judge Karnow ruled that he will retain continuing jurisdiction to enforce his judgment and the peremptory writ of mandate.
As expected, on Nov. 16, MWD filed a motion for a new trial in the litigation. That motion will be heard on Dec. 17. The court has 60 days from Nov. 16 to rule on the motion for a new trial. In addition, MWD has already has said it will appeal the trial court’s decision, a move that could significantly delay payment of the Water Authority’s judgment. 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.
As the prevailing party in the lawsuit, the Water Authority will file a motion to recover its attorney’s fees and costs from MWD.
In August 2015, Judge Karnow issued a final decision that says MWD must pay the Water Authority $188.3 million plus interest for illegal water rates MWD charged from 2011 to 2014. He also determined that MWD has been under-calculating the Water Authority’s preferential right to MWD water supplies by improperly excluding hundreds of millions of dollars of payments made by the Water Authority.
The Aug. 28 final ruling affirmed the tentative ruling Judge Karnow issued July 15. In his final ruling, Judge Karnow 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 Angeles-based wholesaler. Instead, he said the Water Authority is entitled to the damages it claimed – four years of overpayments totaling $188.3 million, plus interest. If allowed to stand, MWD’s overcharges would have exceeded $2 billion over 45 years.
The final ruling by Judge Karnow included a determination that MWD’s interpretation of a statutory water rights formula has improperly excluded payments by the Water Authority for transporting the Water Authority’s independent Colorado River water supplies. By law, each MWD member agency is entitled to a percentage of MWD’s available water supplies at any time based on all payments made to MWD throughout history – “excepting the purchase of water.”
The court 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, rejecting MWD’s argument that the Water Authority’s transfer supplies were purchases of MWD water that should therefore be excluded from the calculation of preferential rights. Correct assessment of the Water Authority’s preferential rights will mean access to tens of thousands of acre-feet of water per year for the San Diego region, a significant increase in supplies.
As the prevailing party in the lawsuit, the Water Authority plans to file a motion to recover its attorney’s fees and costs from MWD. The Water Authority is represented by Keker & Van Nest of San Francisco and by Brownstein Hyatt Farber Schreck, a national firm with offices in San Diego.
In April 2014, Judge Karnow issued his final statement of decision in Phase 1 of the Water Authority's legal challenge to rates set by the Metropolitan Water District of Southern California. Judge Karnow upheld and strengthened his tentative ruling issued Feb. 25. Judge Karnow ruled that MWD's rates for 2011, 2012, 2013 and 2014 violate cost of service requirements of California’s Constitution, statutes and common law. Specifically, Judge Karnow’s final statement of decision is that MWD’s rates violate:
- Proposition 26
- the Wheeling Statute
- Government Code Section 549997(a)
- Common law rules that apply to ratemaking
The final Phase 1 ruling came in lawsuits filed in 2010 and 2012 by the San Diego County Water Authority challenging rates imposed by MWD for 2011-2014.
Over the five-day trial held Dec. 17-23, 2013, 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 flawed rates create overcharges for San Diego County for the transportation of water and corresponding undercharges for the water MWD sells to its member agencies.
The Water Authority first sued MWD in June 2010 for adopting illegal rates that are not based on the costs of providing the services for which they are collected. The Water Authority 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 allocation.
On May 30, 2014, the Water Authority filed a third legal challenge against MWD’s rates following a decision by the MWD Board to adopt rates for 2015 and 2016 using the same illegal methodology it used the prior four years.
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.
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.
- 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.