On September 27, 2017, the California Supreme Court denied a petition by San Diego County Water Authority (“SDCWA”) to review an appellate court decision in its case against Metropolitan Water District of Southern California (“Metropolitan”).
The case involves a dispute over the rates that Metropolitan charged SDCWA for transportation of SDCWA’s independent Colorado River water supplies between 2011 and 2014. SDCWA filed lawsuits arguing Metropolitan improperly included State Water Project costs and the Water Stewardship rate in its calculation of the wheeling rate and price under an Exchange Agreement between the SDCWA and Metropolitan.
In 2014, Superior Court Judge Curtis E.A. Karnow issued a ruling agreeing with SDCWA’s argument. SDCWA had paid $445/AF, where a properly calculated rate would have been $143/AF. In a subsequent decision, 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. (For additional background, see “Judge Karnow Issues Tentative Ruling in San Diego-MWD Wheeling Dispute,” JOW February 2014, and “Judge Karnow Finds for San Diego on Challenges to MWD Rates,” JOW July 2015).
On June 21, 2017, the 1st District Court of Appeal ruled that Metropolitan had improperly included the Water Stewardship rate, but found Metropolitan could include certain State Water Project charges. Under the appellate court’s ruling, the lawful rate was $404/AF, and Metropolitan owes SDCWA $51 million for improperly assessed Water Stewardship charges.
The appellate court also held that incorrectly setting the wheeling rate constituted a breach of contract, required Metropolitan to adopt legal rates, and required Metropolitan to remove a clause that it used to disqualify SDCWA local projects from receiving funding from Metropolitan. In addition, the court upheld a lower court ruling that Metropolitan had incorrectly calculated SDCWA’s 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. Metropolitan failed to account for the payments SDCWA made under the Exchange Agreement, which governs SDCWA’s purchase of transportation, not water. The court held that SDCWA is entitled to about 100,000 AF of additional preferential rights from Metropolitan. The question of whether SDCWA is entitled to recover attorneys’ fees—and the amount that can be recovered—will be decided on remand to the trial court.
SDCWA appealed to the California Supreme Court over the appellate court’s analysis of State Water Project supply costs. With the Supreme Court denying SDCWA’s petition, the appellate court decision stands. Because SDCWA’s payments under the Exchange Agreement underwrite a portion of State Water Project costs, the appellate court decision will likely lead to increased water transfer activity from Northern California. (For an analysis of this dynamic, see “Appellate Court Wheeling Decision Puts More Pressure on Northern California Water Supplies,” Hydrowonk Blog August 29, 2017).
Written by Marta L. Weismann