Phase 2 of San Diego/MWD Wheeling Case Commences

On March 30, the Metropolitan Water District of Southern California (“Metropolitan”) and the San Diego County Water Authority (“San Diego”) entered Phase 2 of the litigation over Metropolitan’s wheeling rates.  During Phase 1 of the trial, Judge Curtis E.A. Karnow concluded that Metropolitan’s wheeling rates were unlawful.  Metropolitan improperly included the costs of its State Water Project water in the System Access Fee as a transportation cost, SWP power costs to deliver MWD’s State Project water in the System Power Rate, and the Water Stewardship Rate (which fund’s water conservation programs and local water development), all of which resulted in inflated fees charged for transportation.  These errors violated Proposition 26, California’s Wheeling Statute (aka “Katz Wheeling Bill”), a section of the Government Code, 549997(a) and common law principles of rate-making.

The purpose of Phase 2 is to establish San Diego’s damages for the years 2011 through 2014.  The parties’ pre-trial briefs offer different takes.

San Diego argues that damages should be based on correcting rate calculations for the errors.  Therefore, SWP costs (including power) should be included in water supply rates, and wheeling should not pay the Water Stewardship Rate.  In effect, San Diego’s damages would be based on how much the improper inclusion of the impermissible costs increased San Diego’s payment to Metropolitan.

Metropolitan takes a different approach.  Rather than addressing the issue of damages (which it proposes to defer until post-trial briefing), it advances a “benefit of the bargain” theory where San Diego agreed to Metropolitan’s rates.

Metropolitan notes that there was a 1998 Exchange Agreement in which San Diego would exchange Colorado River water it acquired from the Imperial Irrigation District for a like amount of water Metropolitan delivers from all its water sources.  Under the 30-year agreement, San Diego would pay $90/AF for the first twenty years (subject to 1.55% escalation) and $80/AF for the next ten years (subject to 1.44% escalation) for the exchange water.  One of the conditions of the agreement was that the California Legislature appropriate $235 million for lining the All American and Coachella Canals, which it did.  Under federal law, Metropolitan has the right to use water conserved by canal lining if California agricultural users of Colorado River water (Palo Verde Irrigation District, Imperial Irrigation District and the Coachella Valley Water District) do not exercise their prior right to use the conserved water; if they do, they must reimburse the funder of the lining projects for costs.

When the various agreements among California parties (the Quantification Settlement Agreement) were entered into in 2003, Metropolitan and San Diego entered into a new Exchange Agreement.  Under the 2003 Exchange Agreement, San Diego agreed to pay Metropolitan wheeling rates in exchange for the assignment of $235 million of state funding of canal lining projects and Metropolitan’s right to receive canal lining water.  Metropolitan rates had to be lawful.  In 2003, Metropolitan set its wheeling rate at $235/AF plus a power charge.

Metropolitan argues that this history provides it with an affirmative defense in the wheeling litigation.  It believes that the payment of exchange rates specified in the 2003 Exchange Agreement is San Diego’s “burden” for securing the benefits its receives ($235 million in funding and conserved water from the lining of the All American and Coachella Canals).

Metropolitan advances many other arguments about prior appellate court decisions, contractual interpretations and factual assertions.  It also promises the court that there are many other issues in the case.  It suggests that they should be addressed in post-trial briefings based on the evidence submitted during the trial.

 

Written by Rodney T. Smith, Ph.D.