Tentative ruling for CA water district's violation of cost-of-service requirements

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SAN DIEGO, CA, Feb. 26, 2014 -- On Tuesday, Feb. 25, San Francisco County Superior Court Judge Curtis E. A. Karnow tentatively ruled that the Metropolitan Water District of Southern California (MWDSC) violated cost-of-service requirements of California's Constitution, statutes and common law in setting rates for the last three years.

Karnow's tentative determination is that MWDSC's rates violate Proposition 26, the Wheeling Statute, Government Code Section 549997(a), and common law rules that apply to ratemaking. The tentative ruling came in lawsuits filed in 2010 and 2012 by the San Diego County Water Authority (SDWA) challenging rates imposed by the Los Angeles-based MWDSC for 2011-2014, inclusive.

Karnow's ruling agreed with the SDWA's position that MWDSC's rates must be based on the actual costs of providing service and must be reasonably related to the burdens imposed and benefits received by its member agencies. He also tentatively ruled that the District's rates for 2013 and 2014 are subject to Prop. 26, approved by voters in November 2010.

That proposition, now embodied in California's Constitution, shifted the burden to public agencies to prove they are not charging more than the actual cost of the services they provide. MWDSC had contended in court that it was exempt from Prop. 26 as well as other constitutional and statutory provisions of California law. Karnow tentatively ruled in MWDSC's favor on the question of whether or not its rates fairly account for the costs of dry-year peaking by its member agencies.

Karnow is expected to set a date to hear SDWA's two remaining causes of action in the litigation. One alleges that MWDSC breached its 2003 contract with the Authority in which it pledged to set lawful rates that the court has now ruled were illegal. The other claim alleges that MWDSC has under-calculated the SDWA's preferential right to its water by illegally excluding hundreds of millions of dollars of payments SDWA has made to MWDSC since 2003 to transport the agency's independent Colorado River supplies.

If, in Phase 2, the court finds that MWDSC breached its contract with the SDWA, the agency will be required to refund tens of millions of dollars in disputed payments that the Authority has made since 2011. If the court awards such a refund, SDWA will deduct its litigation expenses and return the remaining money to its 24 member agencies in proportion to their past payment of MWDSC's illegal charges.

Stakes in the litigation amount to more than $2 billion for San Diego County residents over 45 years. During a five-day trial in December, SDWA's attorneys presented evidence and witness testimony that proved MWDSC'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 MWDSC base their rates on the actual costs of the services provided.

The parties will have 15 days to file objections to the Court's order, after which it will issue a final statement of decision. A second phase of the trial will be scheduled on SDWA's claims based on breach of contract and preferential rights.

About The San Diego County Water Authority

is a public agency serving the San Diego region as a wholesale supplier of water from the Colorado River and Northern California. The Water Authority works through its 24 member agencies to provide a safe, reliable water supply to support the region’s $188 billion economy and the quality of life of 3.1 million residents. For more information, visit www.sdcwa.org.

About The Metropolitan Water District of Southern California

The Metropolitan Water District of Southern California is a consortium of 26 cities and water districts that provides drinking water to nearly 19 million people in parts of Los Angeles, Orange, San Diego, Riverside, San Bernardino, and Ventura counties. Metropolitan currently delivers an average of 1.7 billion gallons of water per day to a 5,200-square-mile service area. For more information, visit www.mwdh2o.com.

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