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San Diego County Water Authority Wins Landmark Ruling in Rate Challenge Against Metropolitan Water District of Southern California
Ruling is tentative and subject to a further court hearing on objections
February 25, 2014
In a major victory for the San Diego County Water Authority and water ratepayers throughout San Diego County, San Francisco County Superior Court Judge Curtis E. A. Karnow today tentatively ruled that in setting rates for 2011, 2012, 2013 and 2014, the Metropolitan Water District of Southern California violated cost of service requirements of California’s Constitution, statutes and common law. Specifically, Judge Karnow’s tentative determination is that MWD’s rates violate:
- Proposition 26;
- the Wheeling Statute;
- Government Code Section 549997(a); and,
- Common law rules that apply to ratemaking.
The tentative ruling came in lawsuits filed in 2010 and 2012 by the San Diego County Water Authority challenging rates imposed by the Los Angeles-based Metropolitan Water District of Southern California for 2011-2014, inclusive. The parties will have 15 days to file objections to the Court’s order, after which the Court will issue a final statement of decision. A second phase of the trial will be scheduled on the Water Authority’s claims based on breach of contract and preferential rights.
“Today’s tentative ruling validates the difficult and extraordinary measures the Water Authority was forced to take to protect the ratepayers and the economy of San Diego County,” said Thomas V. Wornham, Chair of the Water Authority’s Board of Directors. “MWD has fought us every step of the way for more than three and one-half years, but our Board of Directors, our member agencies and the entire San Diego community have stood united and resolved to fight these illegal rates. We will continue to fight for lawful rates from MWD inside and outside the courtroom.”
The judge’s tentative ruling agreed with the Water Authority’s long-standing position that MWD’s rates must be based on the actual costs of providing service and must be reasonably related to the burdens imposed and benefits received by MWD’s member agencies. Notably, Judge Karnow also tentatively ruled that MWD’s rates for 2013 and 2014 are subject to Proposition 26, approved by voters in November 2010. That proposition, now embodied in California’s Constitution, shifted the burden to public agencies to prove they are not charging more than the actual cost of the services they provide. MWD had contended in court that it was exempt from Prop. 26 as well as other constitutional and statutory provisions of California law.
“This is a great day, not only for San Diego, but for the more than 18 million people who pay MWD’s water rates and charges,” said Wornham. “Even though MWD periodically gave lip service at trial and during its rate-setting process that its rates complied with cost of service requirements, it also claimed that there were no limits on what rates it could charge so long as its board of directors voted for them.”
Judge Karnow tentatively ruled in MWD’s favor on the question of whether or not its rates fairly account for the costs of dry-year peaking by its member agencies.
Judge Karnow is expected to set a date to hear the Water Authority’s two remaining causes of action in the litigation. One alleges MWD breached its 2003 contract with the Water Authority in which it pledged to set lawful rates – rates the court has now ruled were illegal. The other claim alleges MWD has under-calculated the Water Authority’s preferential right to MWD water by illegally excluding hundreds of millions of dollars of payments the Water Authority has made to MWD since 2003 to transport the agency’s independent Colorado River supplies.
If, in Phase 2, the court finds MWD breached its contract with the Water Authority, the agency will be required to refund tens of millions in disputed payments the Water Authority has made since 2011. If the court awards such a refund, the Water Authority 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 charges.
Stakes in the litigation amount to more than $2 billion for San Diego County residents over 45 years. During a five-day trial in December, the Water Authority’s attorneys presented 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.
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 expressly designed to protect MWD’s monopoly and to discriminate against the Water Authority by shifting water supply costs to transportation rates and keep rates for purchasing MWD’s water artificially low.
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 argued that it is exempt from Proposition 26, a voter-approved initiative in November 2010 that amended the California Constitution.
For more information about the Water Authority’s lawsuits, including Tuesday’s tentative decision, go to www.sdcwa.org/mwdrate-challenge.