On April 24, Judge Curtis Karnow of San Francisco Superior Court issued a 67-page Statement of Decision in favor of the San Diego County Water Authority (San Diego) in its long-running challenge to water rates set by the Metropolitan Water District of Southern California (MWD). MWD is the regional water wholesaler for most of southern California, including Los Angeles, Orange County, San Diego, San Bernardino, and most of Riverside and Ventura counties. It brings in water from the Colorado River and northern California, which it then sells to various cities and water agencies. San Diego is one of MWD’s member agencies, and the only member agency that, in addition to buying MWD water, also contracts with MWD for a substantial volume of transportation services, related to San Diego’s acquisition of independent Colorado River water supplies from the Imperial Irrigation District and the lining of two canals, the All-American and the Coachella Canals, in southeastern California. MWD has an “unbundled” rate structure, in which it charges separate rates for the different services it provides (a Supply Rate, a series of Transportation Rates, a Treatment Surcharge, etc.)

San Diego sued MWD in 2010 and then again in 2012, alleging that MWD’s Transportation Rates violated the California Constitution (including Proposition 26), numerous California statutes and common law rules affecting ratemaking. These various provisions prohibit MWD from charging rates that recover more than the cost of the services it provides. In our cases, San Diego alleged that MWD illegally and intentionally miscategorized certain water supply costs—including MWD’s costs of obtaining water from the California Department of Water Resources and the cost of conservation programs it operates—as transportation costs. MWD did so in order to artificially inflate its Transportation Rates, prevent San Diego from getting the financial benefit from its purchase of third-party water, and prevent rates from going up for member agencies, such as Los Angeles and Orange County, that don’t use MWD for standalone transportation services.

After a one-week bench trial in December 2013, Judge Karnow issued a Statement of Decision that largely adopted the positions San Diego has advocated for years. He held that MWD’s rates violate Proposition 26, the California Wheeling Statute, Government Code section 54999.7 and the common law. He held that, under any standard of review, there was not substantial evidence supporting MWD’s rate decisions. And he rejected Met’s positions that its rates are exempt from Prop. 26, and that it could charge more in its rates than the cost of the services it provides, so long as that is approved by 2/3 of the MWD Board of Directors.

This completes the first phase of the case. The Court will soon set a trial date for the second phase, for resolving San Diego’s claim that MWD breached a contract between MWD and San Diego for the transportation of San Diego’s water purchased from third parties (by charging San Diego unlawful rates), and a claim for declaratory relief concerning the calculation of San Diego’s preferential rights to MWD water supplies. This second phase will resolve the status of more than $135 million in disputed monies representing the amount San Diego has been overcharged over the last four years. San Diego estimates that, if MWD’s unlawful rates are not corrected by the courts, the citizens of San Diego County will be overcharged by more than $2 billion over 45 years.

“This is an important victory and vindication for the San Diego County Water Authority, which has been arguing for years that it is overcharged by Met for transportation services. Judge Karnow’s thorough, careful decision is an important reminder that no government agency is above the law. The Court affirmed that water rates must be based on cost-of-service principles, rather than political favoritism,” said San Diego County Water Authority attorney, Keker & Van Nest Partner Warren Braunig. “The Court’s decision is actually quite conservative in its approach. Judge Karnow repeatedly gave Met the benefit of the doubt and still found that there was no substantial evidence supporting Met’s rate decisions.”