The second phase of the San Diego County Water Authority’s landmark rate case against the Metropolitan Water District of Southern California ended today in San Francisco Superior Court. A tentative decision is anticipated by June, and a final ruling is expected by August.
In April 2014, the Water Authority prevailed in the first phase of the case, with Judge Curtis E. A. Karnow ruling that rates charged by MWD in 2011-2014 are illegal and violate several provisions of California law and the state constitution.
A ruling in 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. The Water Authority has calculated that MWD has overcharged San Diego County ratepayers tens of millions of dollars each year since 2011. Whatever damages the Water Authority receives, its Board of Directors has already 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.
Phase 2 also will determine whether 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. The preferential rights issue is significant because 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.
“Given the result of the first phase of the trial, we are guardedly optimistic the Phase 2 ruling will have a positive outcome for our ratepayers,” said Mark Weston, chair of the Water Authority’s Board of Directors. “The severity of the current drought highlights the importance of standing up for our region and for lawful water rates. Should we prevail again, we will be able to return millions of dollars to our member agencies, and we will secure our rights to additional water supplies. Those are both goals worth fighting for to protect our region’s $206 billion economy and quality of life for its 3.1 million residents.”
The second phase of the trial included hearings on March 30 and April 1, 2, 27, 28 and 29. Appeals are likely.
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. That case has been stayed by stipulation of the parties pending the final outcome of the current cases.
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 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.