MWD Owes Water Authority $232 Million, Judge Declares

Short Title
MWD Owes Water Authority $232 Million, Judge Declares
Court Orders MWD to Pay $43.4 Million in Rate Case Interest Charges
October 10, 2015

A San Francisco Superior Court judge ruled late Friday that the Metropolitan Water District of Southern California owes the San Diego County Water Authority $43.4 million in prejudgment interest, in addition to the $188.3 million awarded on Aug. 28 as contract damages for illegal rates MWD charged from 2011 to 2014. The order brings the amount MWD owes the Water Authority to $231.7 million.

Judge Curtis E.A. Karnow ruled that the Water Authority is entitled to 10 percent interest annually on money that MWD overcollected, applying the mandatory prejudgment interest rate set by the state Legislature to encourage defendants to pay their debts on time. The post-judgment interest rate is 7 percent annually, meaning the total amount due to the Water Authority under the court’s final judgment will continue to grow until MWD pays what it owes.

MWD argued it owed only $4.16 million in prejudgment interest; the Water Authority argued it was owed $43.4 million. Judge Karnow awarded $43,415,802. Added to the damages Judge Karnow awarded in August, this fixes the final judgment amount at $231,711,404. Under state law, this amount will accrue 7 percent interest annually until MWD pays the judgment.

Judge Karnow’s ruling will be incorporated into the final judgment concluding the two cases, which is expected to be entered later this year. Once final judgment is entered, MWD will have 60 days to file an appeal. MWD already has said it will appeal the trial court’s decision, a move that could significantly delay payment of the Water Authority’s judgment.

The Water Authority’s Board of Directors already has 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.

“MWD has dragged out this case for years, and the price tag for its illegal rates and failed litigation strategy continues to grow,” said Mark Weston, chair of the Water Authority’s Board of Directors. “This ruling should serve as another strong signal to MWD that its current rate structure is illegal and should be immediately reformed to comply with state law and the California Constitution.  The rulings have been clear and decisive. It is time to fix the rate structure and avoid more unnecessary litigation costs to water ratepayers.”

In August, 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 by the Los Angeles-based wholesaler. Instead, he said the Water Authority is entitled to every penny of the damages it claimed – four years of overpayments totaling $188.3 million, plus interest. If allowed to stand, MWD’s overcharges against the San Diego region would have exceeded $2 billion over 45 years.

Judge Karnow also ruled in August that MWD’s interpretation of a statutory water rights formula 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 water per year for the San Diego region, a significant increase in supplies.

Earlier – in April 2014 – Judge Karnow ruled that MWD’s 2011-2014 rates violated California statutes and common law that require public water agencies to limit the rates they charge to the costs of providing their services. He also ruled that MWD’s 2013 and 2014 rates violated Proposition 26, passed by California voters in November 2010 and now enshrined in Articles 13A and 13C of the California Constitution. Proposition 26 shifted the burden to public agencies to prove they are not charging more than the actual cost of the services they provide.

As the prevailing party in the lawsuit, the Water Authority will file a motion to recover its attorney’s fees and costs from MWD. The Water Authority is represented by Keker & Van Nest of San Francisco and by Brownstein Hyatt Farber Schreck, a national firm with offices in San Diego.

Additional information about the case, including important court documents, is posted at www.sdcwa.org/mwdrate-challenge.

Litigation background

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. That case has been stayed by stipulation of the parties pending the final outcome of the current cases.