Source: MWD

July 16, 2015 (San Diego)--A San Francisco Superior Court judge ruled in a tentative decision on July 15 that he would require the Metropolitan Water District of Southern California to pay the San Diego County Water Authority $188.3 million plus interest for illegal water rates MWD charged from 2011 to 2014.

“San Diego has proven by a preponderance of the evidence that it was in fact damaged by paying conveyance rates that were higher than Met could have set pursuant to applicable law and regulation,” Judge Curtis E.A. Karnow wrote in his tentative decision.

And later, Karnow said, “each time Met sets unlawful conveyance rates, it breached its obligations.”

Judge Karnow tentatively 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 was entitled to damages it claimed – four years of overpayments at approximately $188 million, plus interest. If allowed to stand, MWD’s overcharges could have exceeded $2 billion over 45 years.

Read the Phase 2 Tentative Statement and Proposed Statement of Decision

In another pivotal tentative ruling, Judge Karnow said MWD has been under-calculating the Water Authority’s preferential right to MWD water supplies. In MWD’s water rights formula, it has improperly excluded hundreds of millions of dollars of 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 upon all payments made to MWD throughout history – “excepting the purchase of water.” 

The court tentatively 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 from lining the All American and Coachella canals in the Imperial Valley. The court rejected MWD’s argument that the Water Authority’s transfer supplies were purchases of MWD water excluded from the calculation of preferential rights.

A final ruling by Judge Karnow is expected in about a month.

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 said it will appeal, a move that would delay refunding of the Water Authority’s overpayments.

In April 2014, Judge Karnow issued his final statement of decision in Phase 1 of the Water Authority's legal challenge to rates set by the Metropolitan Water District of Southern California. Judge Karnow upheld and strengthened his tentative ruling issued Feb. 25. Judge Karnow ruled that MWD's rates for 2011, 2012, 2013 and 2014 violate cost of service requirements of California’s Constitution, statutes and common law.  Specifically, Judge Karnow’s final statement of decision is that MWD’s rates violate:

• Proposition 26;
• the Wheeling Statute;
• Government Code Section 549997(a); and,
• Common law rules that apply to ratemaking.

The final Phase 1 ruling came in lawsuits filed in 2010 and 2012 by the San Diego County Water Authority challenging rates imposed by MWD for 2011-2014.

Read a summary of Phase 1 key findings and the Statement of Decision here.

Over the five-day trial held Dec. 17-23, 2013, in San Francisco Superior Court, the Water Authority’s attorneys presented reams of evidence and witness testimony that proved MWD’s rates artificially inflate the cost of its water transportation services by improperly including unrelated expenses. Numerous California statutes, the California Constitution and common law all require that public agencies such as MWD base their rates on the actual costs of the services provided.

MWD’s flawed rates create overcharges for San Diego County for the transportation of water and corresponding undercharges for the water MWD sells to its member agencies.

The Water Authority first sued MWD in June 2010 for adopting illegal rates that are not based on the costs of providing the services for which they are collected. The Water Authority filed another lawsuit in June 2012 because the 2010 case had not been resolved and MWD had adopted rates for 2013 and 2014 based on its same flawed allocation.

On May 30, 2014, the Water Authority filed a third legal challenge against MWD’s rates following a decision by the MWD Board to adopt rates for 2015 and 2016 using the same illegal methodology it used the prior four years.

Background

Two decades ago, almost all of San Diego County’s water needs were met by a single supplier – the Los Angeles-based Metropolitan Water District of Southern California.  In 1991, after a multi-year drought severely limited water supplies, MWD cut water deliveries 30 percent to the San Diego region, severely impacted the local economy and quality of life. Delivery cuts of 50 percent were only averted by “Miracle March” rains. The Water Authority Board then set forth a course to develop a supply diversification strategy to ensure that the region was never again dependent on a single supplier for nearly all of its water.

The cornerstone of this diversification strategy is a set of historic agreements the Water Authority signed in 2003 to secure its own sources of water from the Colorado River. Under long-term agreements, ranging from 45 to 110 years, the Water Authority purchases water from the Imperial Irrigation District and receives other independent water supplies from relining the All-American and Coachella canals. In order to get this water to San Diego County, the Water Authority uses pipelines that are controlled by MWD.

The Water Authority is the only MWD member agency that uses the pipelines MWD controls to transport a large volume of third party water supplies each year.

MWD’s Misallocation of Costs

The Water Authority believes that MWD is overcharging to transport this water and is using that money to subsidize the cost of water MWD sells to its member agencies. This practice violates the California Constitution, other state law and standard water utility practice.

Water conserved by the All-American Canal lining project is an important part of the Water Authority's Colorado River water supplies.

About half of MWD's supplies come from its purchases from the State Water Project under a supply contract with the Department of Water Resources. Instead of treating these purchases as a cost of water, MWD allocates nearly 80 percent of the cost to charges it imposes for the transportation of the Water Authority's water through MWD facilities - even though MWD does not own the state system, and not a drop of Water Authority's own Colorado River water supplies touches that system. This discriminates against the Water Authority, which is the single largest user of MWD transportation services. The Water Authority uses MWD facilities to transport Colorado River water it purchases under a water conservation agreement with the Imperial Irrigation District, and also from lining sections of the All-American and Coachella Canals.

Financial Impacts to San Diego County Ratepayers

MWD’s illegal rates cause significant financial harm to the San Diego region. The overcharges may grow to as much as $217 million annually as the Water Authority’s independent Colorado River supplies reach their peak in 2021. Collectively, these overcharges could amount to $2.1 billion over the life of the agreements.

Protecting Ratepayers

In 2010, after years of trying to work with MWD to resolve concerns with MWD’s-rate setting practices, the Water Authority filed a lawsuit against MWD for its 2011 and 2012 rates.  The Water Authority filed a second suit in June 2012, after MWD set rates for 2013 and 2014 that were based on the same flawed cost-of-service methodology as the first action. The second lawsuit was necessary because MWD’s delays in the first lawsuit slowed its resolution.

The Water Authority’s two lawsuits against MWD present common factual and legal elements. Each lawsuit asserts that MWD’s rates assign water supply costs to transportation rates in violation of state law and the state Constitution. Both cases also allege that the water rates set by MWD discriminate against the Water Authority by artificially inflating the price charged for “wheeling” (or transporting) water through MWD’s pipes if it is purchased from a water supplier other than MWD.

Why are MWD’s Rates Illegal?

MWD is legally required to charge rates that are reasonably related to the costs of services provided and reasonably allocated among its member agencies according to the benefit they receive from particular services. The Water Authority’s lawsuit claims MWD is improperly charging hundreds of millions of dollars in water supply costs to its System Access Rate, System Power Rate and Water Stewardship Rate. These three rate components comprise MWD’s transportation Rate.

The lawsuits allege:

Range of MWD Overcharges in 2021

The financial impact of MWD's overcharges could vary greatly depending on potential costs to fix the Bay-Delta and incentives to develop local water supplies

• MWD’s rates misallocate MWD’s “supply” costs by characterizing the water MWD purchases under its contract with the State Water Project as “transportation” when in fact MWD does not own or operate any of the facilities that deliver State Water Project water to Metropolitan. The State of California owns and operates those facilities.
• MWD’s rates misallocate MWD’s “supply” costs by characterizing its subsidy investments in water conservation and local water supply projects, such as recycled water and seawater desalination, as “transportation” costs.
• At the urging of self-interested member agencies, MWD’s board has set invalid rates without taking into account where the costs should be properly allocated.  MWD is not following clear industry standards or California law.
• MWD’s illegal rates breach a 2003 contract with the Water Authority in which MWD promised to charge the Water Authority for water transportation services in accordance with state law.
• The 2012 lawsuit additionally alleges that MWD violated Proposition 26, a voter-approved measure passed in November 2011. Prop. 26  aims to prevent public agencies from passing hidden taxes by ensuring that rate increases are tied to cost of service.
• In its 2012 lawsuit, the Water Authority is also seeking to address another major flaw in MWD’s rates: MWD has failed to properly recover tens of millions of dollars annually in operational and other costs it incurs as a “standby” supplier for member agencies whose water demands vary greatly from year to year.  MWD has not performed adequate studies or calculated the costs of purchasing, storing and delivering water supplies to meet the varying annual needs of its member agencies. Instead, MWD misallocates many of these costs to its other rates. MWD's current rate structure is akin to allowing member agencies getting the insurance benefits, without ever paying for the service. This practice forces steady MWD customers, such as the Water Authority, to pay a disproportionate share of the costs of providing this stand-by service.  The annual benefit is estimated at $40 million,  just for the city of Los Angeles, which has historically altered its purchases of MWD water by more than 200,000 acre-feet from one year to the next.

- See more at: http://www.sdcwa.org/mwdrate-challenge#sthash.cOkuEDvg.dpuf