State Supreme Court Denies Review of Rate Case, Confirms Important Victories

Short Title
State Supreme Court Denies Review of Rate Case, Confirms Important Victories
September 27, 2017

The California Supreme Court today denied a petition by the San Diego County Water Authority to review an appellate court ruling in a case of statewide significance over rates set by the Los Angeles-based Metropolitan Water District of Southern California. 

After winning significant victories in the trial court and the appellate court, the Water Authority petitioned the state Supreme Court in July on one single question: whether MWD may add State Water Project supply costs to the price it charges to transport the Water Authority’s independent supplies of Colorado River water through MWD’s aqueduct. The trial court ruled MWD could not, but the Court of Appeal reversed that decision earlier this year. By denying review of the Water Authority’s petition, the Court of Appeal’s decision on this and all other issues it ruled on – including major victories for the Water Authority and its ratepayers – become final. Among those victories:

  • MWD must pay the Water Authority approximately $51 million for so-called “Water Stewardship” charges MWD added to the transportation rates it charged the Water Authority from 2011-2014; the final amount of damages, including pre- and post-judgment interest, will be determined by the trial court on remand. The decision prevents MWD from imposing more than $20 million in illegal charges annually going forward. Through 2047, those unlawful charges would have amounted to approximately $1.1 billion.
  • MWD unlawfully under-calculated the Water Authority’s statutory water right to MWD’s water supply; properly calculated, the Water Authority will be entitled to approximately 100,000 acre-feet of additional MWD water annually – about twice the production of the $1 billion Claude “Bud” Lewis Carlsbad Seawater Desalination Plant. 
  • A contract clause MWD used to disqualify local water supply projects in San Diego County from receiving funding from MWD was unconstitutional. Funding under MWD’s Local Resources Program is from rates charged by MWD. No agency has paid a greater share of MWD’s local projects’ funding. Yet, MWD used the illegal contract clause to prohibit the Water Authority and its member agencies from receiving funds for projects in San Diego County.
  • The Water Authority believes it is entitled to recover attorneys’ fees from MWD, the final amount of which will be determined on remand to the Superior Court.

“While we hoped that the state Supreme Court would strike down all of MWD’s monopolistic rates, our lawsuits have produced noteworthy victories for San Diego County residents – rights to significantly more MWD water, a determination that MWD breached its contract with the Water Authority, and a ruling that MWD illegally collected tens of millions of dollars in overcharges from our region,” said Mark Muir, chair of the Water Authority’s Board of Directors. “In addition, MWD will be prevented from collecting an estimated $1.1 billion in illegal charges over several decades.  

“As we look to the future, our Board will assess how best to protect the interests of San Diego County ratepayers with the continued support of our region’s business associations, civic groups, elected officials and other stakeholders.”   

By denying the Water Authority’s petition, the state’s high court let stand the prior ruling by the Court of Appeal that allows MWD to include its State Water Project supply costs in the rates it charges to transport the Water Authority’s independent Colorado River supplies. The Court of Appeal’s ruling, which allows MWD to artificially inflate the supposed costs of “wheeling” while subsidizing the price of MWD’s own water for sale, will have a chilling effect on water transfers throughout California.

The Water Authority has two additional cases challenging MWD’s rates from 2015-2018 that have been stayed in Superior Court while the appellate proceedings were ongoing and are now expected to move forward again. The Water Authority expects to recover approximately $39 million in illegal MWD charges in those two cases.

The litigation has roots in the 2003 Colorado River Quantification Settlement Agreement and the Water Authority’s historic water conservation-and-transfer agreement with the Imperial Irrigation District, the largest ag-to-urban water transfer in U.S. history. It provided the Water Authority with independent supplies from the Colorado River; however, the transfer required the use of MWD’s aqueduct and pipelines to move the water to San Diego.  

The Water Authority sued MWD in 2010 (and again in 2012) for adding State Water Project charges to the price set for transporting, or “wheeling,” the Water Authority’s independent water supplies to San Diego. After several weeks of testimony at the trial court, San Francisco Superior Court Judge Curtis E.A. Karnow ruled in 2015 in favor of the Water Authority on almost all its claims, including that MWD had overcharged the Water Authority for use of its Colorado River Aqueduct by almost $200 million during the four years at issue in the 2010 and 2012 cases before the court. 

The Water Authority and MWD both appealed parts of the Superior Court’s decisions. The 1st District Court of Appeal in June 2017 ruled in favor of the Water Authority on nine out of 10 key legal points, including that MWD: breached its contract with the Water Authority, which required MWD to set legal rates; undercounted the Water Authority’s right to MWD water by approximately 100,000 acre-feet a year; and collected tens of millions of dollars in illegal “water stewardship” charges from San Diego ratepayers.

But the Court of Appeal ruled against the Water Authority on one important issue, finding that certain State Water Project costs could be treated by MWD as though they were transportation costs and charged to its sole transportation-only customer – the Water Authority. The appellate court ruling allows MWD to maintain protectionist pricing that discourages water transfers by artificially inflating the cost of “wheeling” water from where it is conserved to where it will be used. That’s the opposite of what the Legislature intended and 2009 legislation designed to reduce pressure on the Bay-Delta.

The Water Authority is represented by Neal Katyal of Hogan Lovells US in Washington, D.C.; Keker, Van Nest & Peters of San Francisco; and Brownstein Hyatt Farber Schreck, a national firm with offices in San Diego. Additional information about the rate case, including the Supreme Court petition and the appellate court ruling, is at www.sdcwa.org/mwdrate-challenge.