The second phase of the San Diego County Water Authority’s landmark rate case against the Metropolitan Water District of Southern California starts Monday, March 30, nearly one year after the Water Authority won the first phase with a court ruling that rates set by MWD violate several provisions of California law.
Phase 2 will determine the amount of damages the Water Authority should be awarded as a result of MWD’s breach of its contractual obligation to set legal rates. MWD has overcharged the Water Authority tens of millions of dollars each year since 2011. Whatever damages amount the Water Authority receives, the Water Authority’s Board of Directors already has adopted a policy that the agency 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 overcharges.
Phase 2 will also determine a remaining cause of action asserted by the Water Authority that MWD miscalculates the Water Authority’s preferential right to MWD water. Each MWD member agency has a preferential right, or legal entitlement, to a percentage of MWD’s available water supplies based on a provision in the MWD Act. MWD has understated the San Diego region’s right to purchase water by tens of thousands of acre-feet a year – more than the annual production capacity of the $1 billion Carlsbad Desalination Project that is expected to begin commercial water deliveries this fall.
“We are eager to conclude Phase 2 so we can put an end to MWD’s illegal rates,” said Mark Weston, chair of the Water Authority’s Board. “The preferential rights issue is also significant because our region is entitled to more water than MWD asserts it has a right to under preferential rights. A favorable decision for San Diego County on this issue would be important to helping maintain the economic health of our region, which relies on a dependable water supply and legal rates from MWD.”
The trial dates set by San Francisco County Superior Court Judge Curtis E. A. Karnow are March 30 and April 1, 2, 27, 28, 29 and 30. A tentative ruling is anticipated by late May, and a final ruling is expected by late June.
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 Constitution, 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. That case has been stayed by stipulation of the parties pending the final outcome of the current cases. If allowed to stand, MWD’s overcharges of the San Diego region could exceed $2 billion over 45 years.
For more information about the Water Authority’s lawsuits, including court documents, go to 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. 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.