On July 15, 2015, Superior Court Judge Curtis E.A. Karnow issued a Phase II Tentative Statement and Proposed Statement of Decision in San Diego County Water Authority v. Metropolitan Water District of Southern California involving San Diego’s challenges to Metropolitan’s wheeling rates and calculation of Preferential Rights. Judge Karnow awarded San Diego $188.3 million plus interest for Metropolitan’s contract breach by not setting lawful wheeling rates and declared that San Diego’s wheeling and Exchange Agreement payments must be included in the calculation of San Diego’s preferential rights.
In 2003, San Diego and Metropolitan entered into an Exchange Agreement in which Metropolitan delivers via exchange Colorado River water San Diego acquired from the Imperial Irrigation District and the lining of the All American and Coachella Canals. The Exchange Price was set initially at $253 per acre-foot and thereafter “equal to the charge or charges set by Metropolitan’s Board of Directors pursuant to applicable law and regulation and generally applicable to the conveyance of water by Metropolitan on behalf of its member agencies.”
In his Phase I ruling, Judge Karnow invalidated Metropolitan’s Wheeling rate for Calendar Years 2011-14 because Metropolitan improperly included 100% of its cost of the State Water Project in the System Access Rate and the cost of conservation and local water supply development programs in the Water Stewardship Rate in setting transportation rates (see “Judge Karnow Issues Tentative Ruling in San Diego-MWD Wheeling Dispute,” JOW February 26, 2014). In Phase II, San Diego claims that Metropolitan breached its Exchange Agreement with San Diego when it set illegal rates and improperly computes preferential rights.
Breach. Judge Karnow held that Metropolitan did breach the Exchange Agreement by the setting of unlawful rates. The question debated by the parties was the meaning of provisions about the agreement between Metropolitan and San Diego not seeking any legislative, administrative or judicial forum to change form, substance or interpretation of applicable law or regulation. Judge Karnow concluded that this “stand down provision” was for five years; thereafter, San Diego could contest in a judicial or administrative forum whether Metropolitan’s charges have been set in accordance with applicable law and regulation. In reaching his decision, Judge Karnow relied upon the “plain language” of the agreement. He rejected any “extrinsic” evidence submitted by Metropolitan.
Damages. San Diego sought damages of $188,295,602 plus interest. This calculation was made by removing the State Water Project costs from the System Access Rate and not including the Water Stewardship Rate in the price calculation. In its briefing, Metropolitan noted that the Phase I ruling did not specify what portion of the State Water Project costs should be excluded and what portion of the Water Stewardship Rate should be excluded. Instead, Judge Karnow instructed to segregate costs for transportation from cost for water. San Diego’s calculation effectively assumed that the State Water Project’s transportation facilities are not required for the Exchange Agreement and water stewardship programs are solely for water supply (no transportation).
Metropolitan objected to San Diego’s calculation on two basic grounds. First, Metropolitan argued that San Diego bore the burden of establishing the appropriate percentages of the State Water Project and Water Stewardship programs should be included in lawful rates. Since San Diego provided no evidence on these matters, Metropolitan argued that San Diego failed to meet their burden. Second, to the extent that Metropolitan overcharged San Diego under the Exchange Agreement, Metropolitan underpriced its water supply rates. Therefore, there should be an “offset” in the calculation of damages from the unlawful wheeling rates.
Judge Karnow agreed that San Diego’s calculation may over compensate San Diego. The amount of damages, however, may be fixed using an approximation with a reasonable basis. Judge Karnow found the assumptions reasonable. Metropolitan did not offer a competing calculation.
Preferential Rights. Metropolitan member agencies have “preferential rights” to purchase a quantity of water from Metropolitan equal to Metropolitan’s available water supplies multiplied by a member agency’s share of total cumulative payments for operating and capital costs other than purchase of water. In calculating San Diego’s preferential rights, Metropolitan did not include San Diego’s payments under the Exchange Agreement. Judge Karnow ruled that these payments should be included in the calculation of San Diego’s preferential rights. His reasoning is that San Diego is not purchasing water from Metropolitan under the Exchange Agreement. San Diego is purchasing conveyance.
In both phases of his opinion, Judge Karnow makes a distinction between the provision of water and the transportation of water. San Diego receives Colorado River water from the Imperial Irrigation District and canal lining projects. San Diego receives conveyance from Metropolitan. In his Phase I ruling, Judge Karnow held that wheeling or exchange fee must be based on the cost of conveyance facilities used. Therefore, the pricing of conveyance should not include costs incurred from the provision of water. In his Phase II ruling, Judge Karnow upheld San Diego’s breach of contract claim and accepted San Diego’s calculation of damages. Finding San Diego’s assumptions reasonable approximations, he awarded damages based on San Diego’s calculation.
Written by Rodney T. Smith , Ph.D.