Court to Hear Appeals in Water Authority Litigation Over Illegal MWD Rates
May 08, 2017
On Wednesday, May 10, the 1st District Court of Appeal in San Francisco will hear oral argument in the appeals of the San Diego County Water Authority’s victories in two lawsuits against the Los Angeles-based Metropolitan Water District of Southern California. A decision from the Court of Appeal is due within 90 days of oral argument.
Superior Court Judge Curtis E.A. Karnow ruled in November 2015 that MWD’s rates for 2011-2014 were illegal. The judge directed MWD to pay the Water Authority more than $243 million in damages, costs, pre-judgment interest and attorneys’ fees – the largest plaintiff’s award in the state for 2015. If MWD were allowed to continue its unlawful rate-setting practices, which are not based on the cost of services MWD provides, overcharges to the Water Authority could exceed $7 billion over 45 years.
MWD appealed Judge Karnow’s final judgment and refused to change its rates. If the appellate ruling is appealed to the state Supreme Court, and the Supreme Court accepts review of the appeals, a final determination in the case would likely be delayed until late 2018 or 2019.
In addition to MWD’s appeals of Judge Karnow’s final decision, the Water Authority has asked the 1st District Court of Appeal to review Judge Karnow’s ruling that the agency doesn’t have standing to challenge MWD’s “Rate Structure Integrity” contract clause (also known as “RSI”), which is designed to punish MWD member agencies that contest MWD rates in courts or the state Legislature. The Water Authority believes the RSI clause is an unconstitutional constraint on the Water Authority’s right to petition the courts and exercise free speech, and an unlawful attempt to immunize MWD against illegal, predatory water rates.
The Water Authority filed its initial rate lawsuit against MWD in 2010, then filed a second suit in 2012 because MWD refused to reform its rates, which are not based on the cost of the actual services MWD provides, as required under California law and the state Constitution. A third Water Authority lawsuit was necessary to challenge the MWD rates set for 2015 and 2016, and a fourth to challenge the MWD rates set in 2016 for 2017 and 2018. The third and fourth cases are currently stayed pending resolution of appeals in the first two lawsuits.
Judge Karnow’s final judgment in the 2011-2012 and 2013-2014 cases:
- Invalidated MWD’s transportation rates for 2011-2014, finding that they violated numerous provisions of California law and (in the 2013-14 case only) the state Constitution;
- Ordered MWD to pay the Water Authority $188.3 million in damages and $46.6 million in prejudgment interest; and
- Ordered MWD to recalculate the Water Authority’s statutory right to MWD water supply – a right MWD had illegally under-calculated by tens of thousands of acre-feet annually for more than a decade.
Judge Karnow also mandated that MWD: “Enact only legal transportation and wheeling rates in the future” and “set its rates based upon cost causation – that is, Met must charge for its services based only on what it costs to provide them.”
The Water Authority’s Board of Directors has already determined that any money returned to the Water Authority will be refunded to its 24 member agencies in proportion to their payment of MWD’s illegal overcharges over the years in dispute, after deducting any litigation expenses that are not recovered.
The Water Authority is represented by Keker, Van Nest & Peters, San Francisco, and by Brownstein Hyatt Farber Schreck, a national firm with offices in San Diego.
Additional information about the case, including numerous court documents, is at www.sdcwa.org/mwdrate-challenge.
The Water Authority’s lawsuits stem from historic agreements the agency signed in 2003 to secure independent sources of water from the Colorado River and reduce the San Diego region’s once near-total reliance on MWD for water. To transport its 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.
MWD’s current rates were expressly designed to protect its monopoly and to discriminate against the Water Authority by shifting unrelated water supply costs onto transportation rates, while illegally subsidizing MWD’s water supply rate to the benefit of its 25 other member agencies. The Water Authority filed its first rate lawsuit against MWD in 2010, then filed a second suit in 2012 because MWD refused to reform its rates, which effectively force San Diego County ratepayers to subsidize water ratepayers in other parts of Southern California. The two cases were coordinated for trial, with the main issues being broken into two phases of hearings.
Attorneys for the Water Authority argued in the December 2013 Phase 1 trial that MWD had loaded unrelated costs onto the rate it charges for transporting water – a scheme that disproportionately damages San Diego County ratepayers because the Water Authority is the only water agency that uses MWD’s transportation service (also known as “wheeling”) to move large volumes of supplies purchased from sources independent of MWD.
MWD asserted in court that it can set 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 contended in court that it was exempt from Proposition 26, as well as other constitutional and statutory provisions of California law.
On April 24, 2014, Judge Karnow issued a final statement of decision in Phase 1 of the trial that said MWD violated cost-of-service requirements in California’s statutes and common law when setting rates for 2011, 2012, 2013 and 2014. He also said MWD’s 2013 and 2014 rates violate Proposition 26, approved by voters in November 2010 and embodied in the California Constitution as Article 13C. Proposition 26 shifted the burden to public agencies to prove they are not charging more than the actual cost of the services they provide.
After the April 2014 ruling, the Water Authority was forced to file another lawsuit because MWD set its rates for 2015 and 2016 using the same methodology and cost allocation declared by the court to be illegal. A fourth Water Authority lawsuit challenged MWD rates in 2017 and 2018. The third and fourth cases have been stayed by stipulation of the parties pending the final outcome of the current cases.
In August 2015, following the Phase 2 trial on the Water Authority’s breach of contract and preferential rights claims, Judge Karnow issued a final ruling that rejected all of MWD’s defenses to the Water Authority’s legal challenges, including the contention that the Water Authority consented to being overcharged. Instead, he said the Water Authority is entitled to the contract damages it claimed – four years of overpayments totaling $188.3 million, plus interest.
Judge Karnow also ruled in August 2015 that MWD’s interpretation of a statutory water rights formula (known as “preferential rights”) 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 conserved water from lining the All-American and Coachella canals in the Imperial Valley, rejecting MWD’s argument that the Water Authority’s transfer supplies were actually purchases of MWD water that should therefore be excluded from the calculation of preferential rights. A correct calculation of the Water Authority’s preferential rights translates to the availability of tens of thousands of acre-feet of more water per year for the San Diego region, a significant increase in supplies.
In November 2015, the final judgment by Judge Karnow combined rulings he issued in 2014 and 2015. He also issued a writ of mandate that requires MWD to adhere to his ruling in all future rate-settings.
In subsequent rulings, Judge Karnow awarded the Water Authority $8.9 million in attorneys’ fees and more than $320,000 in court costs.