Lead Opinion
The City of Los Angeles acting by and through the Los Angeles Department of Water and Power: Michael N. Feuer, City Attorney, Joseph A. Brajevich, General Counsel, Julie C. Riley, Deputy City, Melanie Tory, Deputy City Attorney, MEYERS, NAVE, RIBACK, SILVER & WILSON, Amrit S. Kulkarni, Gregory J. Newmark, Los Angeles
Municipal Water District of Orange County: ALESHIRE & WYNDER, LLP, Stephen R. Onstot
City of Torrance: John L. Fellows III, CITY ATTORNEY, Patrick Q. Sullivan, ASSISTANT CITY ATTORNEY
Las Virgenes Municipal Water District, Eastern Municipal Water District, Western Municipal Water District, Foothill Municipal Water District, and West Basin Municipal Water District: LEMIEUX & O'NEILL, Steven P. O'Neill, Westlake Village, Michael Silander
Three Valleys Municipal Water District: BRUNICK, MCELHANEY & KENNEDY, Steven M. Kennedy, San Bernardino
Counsel for amicus curiae Upper San Gabriel Valley Municipal Water District: LEMIEUX & O'NEILL, Steven P. O'Neill, Westlake Village
Counsel for Defendants and Appellants San Diego County Water Authority: KEKER, VAN NEST & Peters LLP, John W. Keker, Daniel Purcell, San Francisco, Dan Jackson, Warren A. Braunig, San Francisco, SAN DIEGO COUNTY WATER AUTHORITY, Mark J. Hattam
Pollak, J.
The central issue in dispute is one of cost allocation: May the charge Metropolitan imposes for wheeling water purchased from a third party include an amount calculated to recover Metropolitan's allocable transportation costs over the California Aqueduct, part of the State Water Project, or must the charge be limited to costs allocable to transportation costs over those parts of its system that it owns and utilizes in the particular transaction? In Metropolitan Water Dist. v. Imperial Irrigation Dist. (2000)
With respect to the cross-complaint, we conclude that the trial court correctly held that the condition in the water conservation program contracts penalizing the Water Authority for exercising its right to seek judicial relief from the imposition of unlawful rates is an unconstitutional condition, but that the court erred in holding that the Water Authority lacks standing to challenge that condition.
Therefore, it is necessary to remand the matter to the trial court for further proceedings consistent with this opinion.
I. Factual Background
Metropolitan imports water from Northern California and the Colorado River along hundreds of miles of aqueducts and delivers it to a voluntary collective of public agencies, including the Water Authority. The Water Authority, in turn, delivers the water to retail water agencies serving households and businesses in San Diego County. To put the present controversy between the two agencies in proper perspective, it is necessary to begin with some history and an explanation of the manner in which the fixing of wholesale water rates has evolved.
"The history of California water development and distribution is a story of supply and demand" marked by an "uneven distribution of water resources" by region and season. ( United States v. State Water Resources Control Bd. (1986)
B. Metropolitan
Metropolitan was established by the California Legislature in 1928. ( Imperial Irrigation, supra,
Metropolitan delivers water to a voluntary collective of "26 member public agencies-14 cities, 11 municipal water districts, [and] one county water authority," the San Diego County Water Authority. (The Metropolitan Water District of So. Cal., Who We Are, Overview & Mission < http://www.mwdh2o.com/WhoWeAre/Mission/Pages/default.aspx> [as of June 21, 2017].) Metropolitan's member agencies provide "water to more
The board of directors "sets policy and guides the actions" of Metropolitan. (Imperial Irrigation, supra,
C. The Water Authority
As noted, the Water Authority is one of Metropolitan's member agencies. It "is an independent public agency that serves as San Diego County's regional water wholesaler. It is not part of either the city or county of San Diego governments. The mission of the Water Authority is to provide a safe and reliable supply of water to its 24 member agencies serving the San Diego region's $222 billion economy and its 3.3 million residents." (San Diego County Water Authority, About Us, Frequently Asked Questions and Key Facts < http://www.sdcwa.org/frequently-asked-questions-and-key-facts> [as of June 21, 2017].) The Water Authority stores, treats, and transports imported water to its member agencies, the retail water providers in the region. (Ibid. ) It operates and maintains dams, a water treatment facility, and "the
D. The State Water Project
One of the two primary sources of water for Metropolitan is the State Water Project. The State Water Project "consists of a series of 21 dams and reservoirs, 5 power plants, and 16 pumping plants which stretch from Lake Oroville in Butte County to Lake Perris in Riverside County. Project water flows from the Feather River to the Sacramento River and then into the
Metropolitan has access to the State Water Project conveyance system and an annual allotment of Northern California water through a contract with the California Department of Water Resources, which manages the system. The department "has entered into 31 such water contracts with local governmental entities.... The contracts require regular payments to the state in return for participation in the [State Water Project] System. Not all the districts actually receive water, but all must make payments according to their respective maximum annual water entitlements and the portion of the System required to deliver such entitlements. Those which actually receive water also pay amounts attributable to the water received." ( Goodman v. County of Riverside, supra, 140 Cal.App.3d at pp. 903-904,
E. The Colorado River
The Colorado River is the other of Metropolitan's primary water sources. The river "rises in the mountains of Colorado and flows generally in a southwesterly direction for about 1,300 miles through Colorado, Utah, and Arizona and along the Arizona-Nevada and Arizona-California boundaries, after which it passes into Mexico and empties into the Mexican waters of the Gulf of California.... The river and its tributaries flow in a natural basin almost surrounded by large mountain ranges and drain 242,000 square miles, an area about 900 miles long from north to south and 300 to 500 miles wide from east to west-practically one-twelfth the area of the continental United States excluding Alaska. Much of this large basin is so arid that it is, as it always has been, largely dependent upon managed use of the waters of the Colorado River System to make it productive and inhabitable." ( Arizona v. California (1963)
In 1929, a federal act authorized construction of Hoover Dam to generate electricity, regulate the Colorado River's flow, and apportion the river's water among the several states claiming rights to it. ( Arizona v. California,
"In 1929, the year after the Boulder Canyon [Hoover Dam] Project Act took effect, the Secretary of the Interior requested from California's Division of Water Resources a recommendation of the proper apportionments of California's share of Colorado River water among the various applicants and water users within the state. This request led to the 'Seven-Party Agreement' of August 1931. The terms of this agreement, which apportioned a total of 5.362 million acre-feet of water annually between the parties, were incorporated into contracts between the Secretary of the Interior and various California water users for delivery of Colorado River water under the Boulder Canyon Project Act." ( QSA Cases, supra,
Parties to the Seven-Party Agreement included Metropolitan and the Imperial Irrigation District (Imperial). ( QSA Cases, supra,
F. Exchange agreements between Metropolitan and the Water Authority
The Water Authority has no means of transporting Colorado River water other than over Metropolitan's aqueduct and thus opened negotiations with Metropolitan to transport, or "wheel," Imperial water. "Wheeling" is the industry term for "[t]he use of a water conveyance facility by someone other than the owner or operator to transport water." ( Imperial Irrigation, supra,
Metropolitan and the Water Authority failed to reach a wheeling agreement but they did reach a functionally related water exchange agreement. In 1998, the parties agreed that Metropolitan would receive the water conserved by Imperial and promised to the Water Authority under those parties' transfer agreement in exchange for which Metropolitan would provide the Water Authority with a like quality and quantity of water.
In any water transfer, whether by wheeling or an exchange agreement, there is a physical intermingling of the purchased water with water from other sources. As the Water Authority's assistant general manager testified, a direct water delivery could be accomplished only with an empty aqueduct and pipeline from source to buyer, which does not occur in California where
While functionally related, wheeling and exchange agreements are not the same. A wheeling agreement calls for the transportation of water when there is available capacity in the water conveyance system. An exchange agreement promises the delivery of a specified quantity of water. Water is not wheeled unless available, but an exchange agreement requires delivery of an agreed-upon quantity of water every
After entry of the 1998 exchange agreement, disputes continued among the water agencies over Colorado River water allocations that prevented water deliveries. ( QSA Cases, supra,
Contemporaneously, in 2003, Metropolitan and the Water Authority executed an amended exchange agreement that is the subject of this appeal. Unable to agree upon the long-term price the Water Authority would be charged for water received under the agreement, the parties agreed to an initial price with future prices linked to standard water rates, lawfully set. The parties agreed: "The price on the date of execution of this agreement shall be two hundred fifty three dollars ($253.00) [per acre-foot]. Thereafter, the price shall be 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
G. Metropolitan's Rate-setting Process
Metropolitan is required by statute to establish rates that will generate sufficient revenue to pay its expenses. (Wat. Code Appen., § 109-134.)
Metropolitan followed a four-step "cost of service process" in setting rates for different service components: (1) estimation of revenue requirements to meet expenses, including operating costs and debt service; (2) allocation of revenue requirements to "different categories based on the operational functions served by each cost," for example revenue necessary to pay for water supply, conveyance and storage; (3) allocation of costs based on their causes and characteristics; and (4) "allocation of costs to rate design elements."
Metropolitan's water service rates are now a combination of component rates calculated to recover its costs incurred in purchasing and transporting water to its member agencies. The rate components, with limited exceptions inapplicable here, are volumetric-the rate is a dollar amount per acre foot.
Metropolitan's "supply" rates are calculated to recover costs incurred in purchasing water supply from the State Water Project and Colorado River and in maintaining and developing additional water supplies through transfers and other transactions. There are two tiers of supply rates, depending on the volume of water provided.
Metropolitan's transportation rates are designed to recover the costs of operating and maintaining its vast water conveyance infrastructure. The transportation rates consist of three subcomponents. A "system access rate" is designed to recover the capital, operating, and maintenance costs associated with transportation facilities, including "conveyance" facilities that transport water from the State Water Project and Colorado River Aqueduct and "distribution" facilities that transport water within Metropolitan's service area. (Admin. Code, § 4123) A "system power rate" recovers the cost of pumping water through the State Water Project and Colorado River Aqueduct to Southern California. (Admin. Code, § 4125.) A "water stewardship rate" is designed to recover the costs of conservation programs and other water management programs that reduce and defer system capacity expansion costs. (See Admin. Code, § 4124.) The transportation rates are so-called postage-stamp rates, which are the same no matter how far the water is transported or which transportation facilities are used.
Metropolitan provides both full service, in which it supplies and transports water, and wheeling service, in which it transports water supplied by others.
Under the exchange agreement as amended in 2003, the Water Authority agreed to pay charges "generally applicable to the conveyance of water by
During the administrative process in which Metropolitan's rates were established, the Water Authority challenged the propriety of applying the system access and water stewardship rates to the wheeling service. Metropolitan's general manager responded that a system access rate was adopted, rather than individual aqueduct access rates, because "Metropolitan's system is not a point-to-point service, but an interconnected regional system." "Operational flexibility has been achieved by creating an interconnected regional delivery network integrating the State Water Project ... and the Colorado River Aqueduct ... conveyance systems with the in-basin distribution system. This integrated network allows Metropolitan to incorporate supply from the [project] and the [aqueduct] with a diverse portfolio of geographically dispersed storage programs.... This integrated, regional network allows Metropolitan to move supplies throughout the system in response to supply availability and operational needs." Metropolitan's general manager asserted that its "integrated, flexible system directly benefits all agencies ... as to all services, including wheeling and exchange services."
As to the water stewardship rate-"a volumetric charge upon all water moved through the system that provides a dedicated source of funding for conservation and local resources development"-Metropolitan's general manager asserted that all users benefit from water conservation and thus all users are properly charged for it: "conservation, recycling, and groundwater recovery decrease the region's overall dependence on imported water supplies from environmentally sensitive areas like the Bay-Delta; increase the overall level of water supply reliability in Southern California; reduce and defer system capacity expansion costs; and create available space to be used to complete water transfers. Because conservation measures and local resource investments reduce the overall level of dependence on the imported water system, more capacity is available in existing facilities for a longer period of time. The space in the system made available by conservation and recycling is open to all system users."
II. Trial Court Proceedings
In June 2010, the Water Authority filed its initial action challenging the water rates Metropolitan adopted in April 2010 for 2011 to 2012. In June 2012, the Water Authority filed a second action challenging Metropolitan's
In pretrial proceedings, the court overruled Metropolitan's demurrer based on the statute of limitations. The court also granted Metropolitan's motion for summary adjudication rejecting the Water Authority's claim that Metropolitan imposed an unlawful condition on the water agency's right to petition the courts by precluding member agencies challenging Metropolitan's rate structure from receiving water conservation subsidies funded by that rate structure.
The court informally coordinated the 2010 and 2012 cases and bifurcated the bench trial. The court first determined the validity of Metropolitan's water rates and then decided the contract claim and computation of preferential rights.
In phase one, the court found "no substantial evidence to support Met [ropolitan]'s inclusion in its transportation rates, and hence in its wheeling rate, of 100% of (1) the sums it pays to the California Department of Water Resources' [for the State Water Project] disaggregated by the [State Water Project] as for transportation of that purchased water; and (2) the costs for conservation and local water supply development programs recovered through the Water Stewardship Rate.... [T]hese rates over-collect from
In phase two, the trial court found that Metropolitan had breached the price term of the 2003 exchange agreement because it charged the Water Authority transportation rates that were not "consistent with law and regulation." The court awarded the Water Authority damages equal to the total amount the water agency paid under the exchange agreement from 2011 to 2014 for State Water Project costs and the water stewardship rate. The court acknowledged that the award "may overcompensate" the Water Authority by disallowing all State Water Project costs but found that "[i]t asks too much of [the Water Authority] to require it to recalculate Met[ropolitan]'s rates with any useful degree of precision." The court also held that
III. Metropolitan's Appeal
A. Statutes of limitations
Metropolitan claims the trial court erred in failing to dismiss the Water Authority's rate challenges as untimely. Metropolitan argues the lawsuits contesting water rates for 2011 to 2014 are, in effect, a challenge to its 2002 issuance of public bonds because bond repayment is dependent on rate
The facts are largely undisputed. In March 2002, Metropolitan adopted a new rate structure effective January 2003 with water rates established for supply, transportation and other service functions. In September 2002, Metropolitan issued bonds "payable from and secured by a pledge of" net operating revenue from water sales. Metropolitan has issued similar bonds in the past. The 2002 bond statement to investors summarized revenue from prior years and described the prior and new rate structure and new rates. Metropolitan has increased its water rates several times between 2002 and today but asserts the "rate structure has remained unchanged with each new rate cycle."
Metropolitan concedes "that the opportunity to challenge the amount of Metropolitan's rates renews with each rate-setting" but argues that the Water Authority's
Fees and rates are "subject to attack" when reenacted, even if they are essentially the same as previous ones for which the statute of limitations has expired. ( Barratt American, Inc. v. City of Rancho Cucamonga (2005)
Metropolitan argues that Barratt and similar cases are inapplicable because Metropolitan's rate structure was expressly pledged to the repayment of bonds and the "method of financing" was validated when the 2002 bond issue went unchallenged. Metropolitan notes that the validation of an agency's bond issuance may extend to agency charges that are "part of the bond contract." ( Aughenbaugh v. Bd. of Supervisors (1983)
Aughenbaugh is inapplicable here. Metropolitan's rate structure itself was not pledged for payment of the bonds or otherwise part of the 2002 bond contract. The bond contract promises repayment from net operating revenues, defined as "all revenues received by [Metropolitan] from charges for the sale or availability of water" less operation and maintenance expenses. The bond contract is not premised on a particular charge, rate or rate structure. In fact, Metropolitan is expressly permitted to "prescribe, revise and collect" water charges in generating revenue sufficient to repay the bonds. (Italics added.) The sufficiency of that revenue is not threatened by the lawsuits, which do not dispute Metropolitan's right to recover the cost of service through its rates. Modification of the rate structure may affect the distribution of water charges among Metropolitan's member agencies, but it should not affect Metropolitan's net revenue. Metropolitan acknowledged the security of its revenue when the agency assured its investors in subsequently issued bonds that the Water Authority's challenge to the rate structure would have no effect on revenue. A similar acknowledgement occurs in the 2002 bond contract itself, which states that Metropolitan will "generate the same level of revenues" regardless of its rate structure. The bond issuance was not founded on a particular rate structure.
The lawsuits are not time-barred. The Water Authority filed these actions shortly after Metropolitan adopted the challenged water rates. The actions challenge the validity
The trial court analyzed the validity of Metropolitan's water rates under the wheeling statutes and other legal standards jointly, reasoning that "the core inquiry" was the same: "whether the costs of services (e.g., wheeling) are reasonably related to the costs of providing those services." While there are some differences among the legal standards, we agree that the "core" issue as determined under the wheeling statutes does, as a practical matter, dictate the conclusion that must be reached under the other provisions of law.
The wheeling statutes ( Wat. Code, § 1810 et seq. ) further the declared "policy of the state to facilitate the voluntary sale, lease, or exchange of water or water rights in order to promote efficient use." ( Imperial Irrigation, supra,
The owner of a water conveyance facility determines the amount of fair compensation. ( Wat. Code, § 1812, subd. (b).) In making that determination, the owner must "act in a reasonable manner consistent with the requirements of law to facilitate the voluntary sale, lease, or exchange of water and shall support its determinations by written findings. In any judicial action challenging any determination made under this article the court shall consider all relevant evidence, and the court shall give due consideration to the purposes and policies of this article. In any such case the court shall sustain the determination of the public agency if it finds that the determination is supported by substantial evidence." ( Wat. Code, § 1813.)
In reviewing the trial court's decision, we note that "the Legislature specifically authorized a water conveyance system owner to determine what is 'fair compensation' ( [Wat. Code,] § 1810 ) subject to certain provisions." ( Imperial Irrigation, supra,
As noted above, the court found the wheeling statutes violated by Metropolitan's inclusion in its wheeling rate of State Water Project transportation costs, as part of its system access rate, and of the water stewardship rate. These rate components, the trial court concluded, "over-collect from wheelers, because at least a significant portion of these costs are attributable to supply, not transportation." The court found that Metropolitan's payments to the State Water Project, although assessed separately for supply and transportation, are for the single objective of obtaining a water supply and that conservation programs primarily benefit water supply, not transportation.
1. Inclusion of State Water Project transportation charges in the system access rate
Neither the Water Authority nor the trial court question the basic premise, established in Imperial Irrigation that system-wide transportation costs may be included in the calculation of wheeling rates.
We are unable to understand the basis of the trial court's uncertainty. The State Water Project bills for transportation costs separately from water supply and only this portion of the state's charge is the capital and operating cost component of the transportation expense included in Metropolitan's system access rate. Under Metropolitan's contract with the state, the amount of the transportation charge is designed to "return to the state those costs of the
The California Aqueduct and other State Water Project facilities are not restricted to supplying Metropolitan with project water. Metropolitan's State Water Project contract entitles it to use project facilities to store and transport water procured from nonproject sources and Metropolitan does so. Metropolitan has, to date, chiefly used State Water Project facilities to receive project water but this does not establish that the cost of the facilities should be allocated to supply. The facilities are a conveyance network available to Metropolitan for the transport of both project and nonproject water.
A Metropolitan member agency wheeling nonproject water from Northern California does so using State Water Project facilities. Indeed, evidence was presented at trial of a 2009 transaction in which Metropolitan wheeled water through State Water Project facilities on the Water Authority's behalf. Under the view adopted by the trial court, no part of the cost of those facilities could
The Water Authority makes much of our Supreme Court's remark that Metropolitan's contract with the State Water Project has "a much greater resemblance to a contract for the furnishing of continued water service in the future" than an "agreement for the purchase of an interest in a water system." ( Metropolitan Water Dist. of Southern Cal. v. Marquardt (1963)
The Water Authority asserts that Metropolitan originally characterized its payments under the State Water Project contract as supply costs and that the record contains no reasonable basis for the change in characterization. Although State Water Project costs were initially deemed supply costs, this practice changed when the agency adopted more particularized cost categories and an unbundled rate structure. The Water Authority relies heavily on a 1969 "Water Pricing Policy Study" prepared for Metropolitan by a
In 1997, Metropolitan adopted Resolution 8520 establishing a wheeling rate "to recover fair compensation for the use of its conveyance system." Metropolitan determined that its State Water Project transportation cost is properly included in the wheeling rate as a cost of water transmission because, among other things, Metropolitan has "the right to use [State Water Project] transport facilities for its own purposes, subject to certain conditions." The resolution states: "[I]t is appropriate to set the wheeling rate on a 'postage stamp' basis; that is, a uniform rate per acre-foot of water wheeled regardless of the source of the water, the facilities used in the transaction or the distance the water is moved. A uniform rate is appropriate because of the integrated nature of Metropolitan's conveyance system; because Metropolitan's historic and current rate setting policy has been, and is, based on the postage stamp concept; because postage stamp rate setting is the standard among California water supply entities; because of the administrative impracticability of establishing point-to-point rates; because ... the Metropolitan Water District Act requires that rates shall be uniform for like classes of service throughout Metropolitan; and because [the] Water Code ... defines 'fair compensation' to include reasonable
In its 2002 report of rates and charges, Metropolitan described what remains its current rate structure. Water rates were "unbundled into separate services of supply, conveyance and distribution, water stewardship and power." State Water Project costs were divided between supply, conveyance
In 2010, Raftelis Financial Consultants, Inc. reviewed Metropolitan's rate methodology and found it consistent with industry standards. Concerning the State Water Project, the financial consultant noted that the project provides an annual statement of charges that invoices separately for supply and transportation and stated it was "appropriate" for Metropolitan to assign "these components to the respective functional categories."
The Water Authority offered a different expert assessment. Its retained consultant opined that State Water Project costs should be allocated to supply alone, not allocated between supply and transportation. Bartle Wells Associates approved Metropolitan's practice of dividing Colorado Aqueduct costs between supply and transportation but concluded that a similar division of State Water Project costs was improper because Metropolitan does not own or operate the latter facilities. As discussed, this heavy reliance on ownership is misplaced because the State Water Project owner does not bear its costs-Metropolitan and other contracting agencies do.
In any event, the courts do not weigh competing methodologies to determine the best water rates. We determine only whether substantial evidence supports the fair compensation determination made by the rate-setting agency. Metropolitan's determination is well supported by the record and must be affirmed as regards its system access rate that recovers the cost of its State Water Project transportation payments. The inclusion of these payments in the calculation of Metropolitan's wheeling rate does not violate the wheeling statutes.
As indicated above, Metropolitan's wheeling rate also includes a water stewardship
The trial court found the water stewardship rate to be supply-related, not transportation-related, because the primary benefit of such programs is a reduced need for imported water through development of local water supplies. Metropolitan contends that its "allocation of the Water Stewardship Rate to transportation is reasonable because the demand-management programs it funds create several transportation-related benefits." Metropolitan states that less demand for imported water assures unused capacity for wheeling and reduces capital expenditures for expansion of the conveyance and distribution system.
The record fails to support Metropolitan's inclusion of the water stewardship rate as a transportation cost. A 2012 report prepared by Metropolitan itself states that "[t]he central objective of Metropolitan's water conservation program is to help ensure adequate, reliable and affordable water supplies for Southern California by actively promoting efficient water use."
A water agency's payments to its members to encourage water conservation is outside the scope of recoverable costs contemplated by the wheeling statutes. As previously noted, "fair compensation" for a wheeler's use of a conveyance system is statutorily defined as "the reasonable charges incurred by the owner of the conveyance system, including capital, operation, [and] maintenance" costs. ( Wat. Code, § 1811, subd. (c).) "[A] water conveyance system owner is entitled to reasonable charges it incurs 'for the use of the conveyance system' ( [Wat. Code,] § 1811, subd. (c) ) when there is unused capacity available.... We must give the word 'incurred' its usual and ordinary meaning. [Citations.] ... 'Charges incurred' refers to costs a person becomes subject to or liable for because of an act or transaction. [Citations.] ... '[F]air compensation ( [Wat. Code,] § 1810 ) includes charges the owner, in this case the Metropolitan Water District, becomes subject to or liable for in using the 'conveyance system' ( [Wat. Code,] § 1811, subd. (c) ) to wheel water when it has unused capacity." ( Imperial Irrigation, supra, 80 Cal.App.4th at pp. 1430-1431,
Metropolitan's payments to member agencies to fund water conservation programs is not a cost of using the conveyance system to wheel water.
Water conservation is of undeniable importance. However, the narrow question here is whether substantial evidence supports Metropolitan's determination that the water stewardship rate used to fund conservation programs is recoverable as "fair compensation" for use of the conveyance system. ( Wat. Code, § 1811, subd. (c).) The answer is no.
C. Common law
The trial court also found Metropolitan's wheeling rate and exchange agreement transportation rates in violation of the common law. Under the common law, rates are invalid if they are not based "on the cost of service or some other reasonable
In finding a violation of the common law, the trial court relied on the same reasoning on which it based its conclusions under the wheeling statutes. For the same reasons we reject its conclusion under the common law with respect to Metropolitan's system access rate and agree with its conclusion with respect to the water stewardship rate.
As discussed above, Metropolitan's conveyance system encompasses both its own facilities and State Water Project facilities, which are used as an integrated system to transport water to Southern California. In addition to the evidence summarized above, we also note that Metropolitan commonly uses a single reservoir with intermingled water from the State Water Project and the Colorado River to supply member agencies. The Water Authority purchased Colorado River water from Imperial but, under the exchange agreement, received from Metropolitan a mix of water amounting to roughly 59 percent Colorado River water and 41 percent State Water Project water. At trial, the Water Authority asserted that Metropolitan's use of project water to fulfill the exchange agreement was simply a matter of Metropolitan's convenience, as it was physically possible to route Colorado River water directly to the Water Authority. The point, however, is that Metropolitan uses State Water Project facilities in its standard operations. To dismiss that use as one of convenience
As discussed above, the trial court properly found the water stewardship rate to be supply-related, not transportation-related, so that its inclusion as a component of the wheeling rate and exchange agreement transportation rates is also unlawful under the common law.
D. Proposition 26
The Water Authority asserts, and the trial court found, that the system access and system power rate components in the wheeling and exchange agreement transportation rates violate a constitutional provision enacted as Proposition 26 requiring voter approval for tax levies ( Cal. Const., art. XIII C, § 1 ).
All taxes imposed by a local governmental entity are subject to voter approval. ( Cal. Const., art. XIII C, § 2, subd. (b).) Proposition 26, adopted in 2010, expanded the definition of a tax to include "any levy, charge, or exaction of any kind" except specified charges and assessments. (Id. , § 1, subd. (e).) Among the exclusions from
Metropolitan "bears the burden of proving by a preponderance of the evidence" that its charge is not a tax and that the amount charged "is no more than necessary to cover the reasonable costs of the governmental activity." ( Cal. Const., art. XIII C, § 1.) "We review de novo the question whether the challenged rates comply with constitutional requirements. [Citation.] We
The challenged rates comply with constitutional requirements. As previously discussed, Metropolitan's system access and system power rates recover the cost of its State Water Project transportation payment and other costs incurred in maintaining a water conveyance system. Metropolitan provides a specific service (use of the conveyance system) directly to the payor (a member agency) that is not provided to those not charged and which does not exceed the reasonable costs to Metropolitan of providing the service. ( Cal. Const., art. XIII C, § 1, subd. (e)(2).)
The Water Authority relies on Newhall to argue that Metropolitan's water rates violate Proposition 26 but that case presents a far different factual situation. In Newhall , a wholesale water agency's rate for supplied water was composed of a volumetric charge and a fixed fee based on a retail water agency's water usage of both water supplied and groundwater not supplied by the wholesaler. ( Newhall, supra, 243 Cal.App.4th at pp. 1436-1438,
The trial court held that Metropolitan's water rates also violate a Government Code provision regulating public utility service rates. The statute provides: "Any public agency providing public utility service may impose a fee, including a rate ... for any product, commodity, or service provided to a public agency.... Such a fee for public utility service, other than electricity or gas, shall not exceed the reasonable cost of providing the public utility service." ( Gov. Code, § 54999.7, subd. (a).)
Metropolitan claims the statute applies to retail utility agencies alone, not to a wholesale water agency like itself. We need not address this issue because, for the reasons previously discussed, the system access and system power rates do not exceed the reasonable cost of providing water transportation. Whether or not the statute applies, it has not been violated.
F. Breach of contract
As the trial court held, to the extent that the price Metropolitan charged the Water Authority for wheeling was based on an unlawful rate, there was a breach of the amended exchange agreement providing for future prices "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." Since we have concluded that Metropolitan's system access rate was not improperly included in the wheeling charges, there was no breach in that respect and damages should not have been calculated on that erroneous premise. Since the water stewardship rate was unlawfully charged for the conveyance of water, there was a breach of the agreement in that respect. The Water Authority is entitled to recover damages limited to the overcharges attributable to the unlawful inclusion of the water stewardship rate.
Metropolitan has made several assertions on appeal denying an enforceable contract and actionable breach but none is persuasive. The contract was not illegal at its inception for including a variable price term that was ultimately found to contain an unlawful rate component. Also, contrary to Metropolitan's arguments, the evidence sufficiently establishes a violation of the contractual price term, not just the wheeling rate, and actionable injury is shown by payment of a water stewardship rate unrelated to the transportation services provided.
We must remand the matter for a redetermination of damages based solely on overcharges from inclusion of the water stewardship rate. Prejudgment interest must also be recalculated. On this subject, Metropolitan contends the
G. The Water Authority's preferential right to water supplies
Metropolitan contends the trial court misapplied a statutory provision that establishes a formula for the preferential right of Metropolitan member agencies to
Metropolitan's major source of revenue has shifted from property taxes to water sales, making the exclusion of water purchases from the calculation of preferential rights of increasing significance and contention. ( San Diego County Water Authority v. Metropolitan Water Dist., supra,
We "independently judge the text of the statute, taking into account and respecting" the interpretation of its meaning accorded by the administrative agency charged with its enforcement, here Metropolitan. ( Yamaha Corp. of America v. State Bd. of Equalization (1998)
The exchange agreement cannot fairly be construed to constitute a purchase of water from Metropolitan within the meaning of the preferential rights statute. The
The contract expressly provides that the water delivered to the Water Authority "shall be characterized as Metropolitan water ... only for the limited purposes of [the price provision] and the interim agricultural water program." Under the referenced price provision, the Water Authority agreed to pay a price equal to the transportation rates lawfully set for the conveyance of Metropolitan-supplied water. In agreeing to pay rates equal to the Metropolitan-supplied water rates, the Water Authority did not agree it was purchasing Metropolitan water. There was no purchase of Metropolitan water and, thus, payments under the exchange agreement must be credited in the calculation of preferential rights.
IV. The Water Authority's Cross-appeal
A. Metropolitan imposes an unconstitutional condition on member agencies' participation in water conservation programs
Metropolitan uses revenue from its water stewardship rate to fund water conservation programs. The programs are designed to meet Metropolitan's "long term water supply reliability goals" and satisfy a legislative mandate to "expand water conservation, water recycling, and groundwater recovery
Since April 2005, Metropolitan has included in all water conservation program contracts a page-long "Rate Structure Integrity" (RSI) clause. The clause states, in relevant part, that the contracting member agency "agrees and understands" that the existing rate structure "provides the revenue necessary to support" conservation programs. The agency further agrees to address "any and all" disputes regarding the existing rate structure through the administrative process and "if they file or participate in litigation or support legislation to challenge or modify [Metropolitan's] existing rate structure ... Metropolitan may initiate termination of this agreement." If Metropolitan decides to terminate it must provide written notice to the agency, which may request mediation of the dispute. "If mediation does not result in an agreement acceptable to each party ... the notice of intent to terminate shall be reinstated." The RSI clause makes no provision for restoring terminated benefits if a court upholds a recipient's challenge to Metropolitan's rates and finds the challenged rates to be illegal.
Metropolitan deems the Water Authority's initiation of the 2010 and 2012 lawsuits at issue on this appeal to be a violation of the RSI clause. Shortly after the Water Authority filed the 2010 action, Metropolitan sent notice of its intention to terminate six water conservation project contracts containing the RSI clause. In response, the Water Authority requested mediation, as
The Water Authority sought a declaratory judgment declaring invalid and unenforceable the RSI clause. The Water Authority alleges the RSI clause constitutes an "unconstitutional condition" on the Water Authority's ability to
Metropolitan's stated purpose for the RSI clause is "to ensure funding for its long-term project contracts by protecting the stability of [its] integrated rate structure, which provides the funds necessary to pay for the ... programs." Metropolitan asserts that " '[l]egal and legislative challenges to Metropolitan's rate structure outside the established public board process could have an adverse impact on Metropolitan's ability to sustain project and program funding and are disruptive and costly.' " Metropolitan concedes that "[t]he possibility that [the Water Authority] might sue to challenge [Metropolitan's] rates was a consideration in proposing the RSI provision."
The Water Authority alleges the RSI clause violates article I, section 3 of the California Constitution.
In Parrish , the California Supreme Court ruled a county could not constitutionally condition the continued receipt of welfare benefits upon the recipients' advance consent to random, exploratory searches of their homes-searches otherwise prohibited by the Fourth Amendment. ( Parrish, supra, 66 Cal.2d at pp. 270-275,
We agree with the trial court that the RSI clause imposes an unconstitutional condition on water conservation funding. Metropolitan argues that payments under the water conservation contracts are not "public benefits" so that the unconstitutional conditions doctrine does not apply. Metropolitan says public benefits are those made available to the general public, such as welfare benefits or the use of public property. But the term "public benefit" simply means a benefit conferred by a government entity, as opposed to a benefit conferred by a private actor. (See Robbins v. Superior Court, supra,
Also unavailing is Metropolitan's argument that the Water Authority waived its right of petition by entering into water conservation contracts
We also reject Metropolitan's contention that material issues of fact exist to preclude summary adjudication. The undisputed facts show insufficient justification for the punitive RSI clause. To justify such a measure, Metropolitan must show that (1) conditioning water conservation program payments on member agencies' surrender of their petitioning rights is reasonably related to rate stability; (2) the public value of imposing the condition manifestly outweighs its burden on constitutional rights; and (3) there are no less restrictive means to achieve rate stability. ( Parrish, supra,
Although the trial court correctly held the RSI clause contains the elements of an unconstitutional condition, the court denied the prayer to invalidate the provision on the ground that the Water Authority lacks the standing to challenge the condition. In this respect, we conclude the trial court erred. The constitutional right at issue here is the right to petition government for the redress of grievances under article I, section 3(a) of the California Constitution. The right to petition includes the right to seek judicial relief. (E.g., Jersey v. John Muir Medical Center (2002)
In Bradbury , the court deemed "without merit" the argument that the anti-SLAPP statute protects private citizens but not government entities. ( Bradbury v. Superior Court, supra, 49 Cal.App.4th at pp. 1113-1114,
Although the California Supreme Court approved these cases as a matter of statutory interpretation without reaching the constitutional issues ( Vargas v. City of Salinas, supra, 46 Cal.4th at pp. 16-17,
In holding that San Diego Water Authority has no constitutional right to petition, the trial court relied primarily on Star-Kist Foods, Inc. v. County of Los Angeles (1986)
Star-Kist pointed out that one reason for recognizing the standing of the public agencies in that case was that there was "a real possibility that the constitutionality of the Legislature's scheme ... would have gone unchecked absent challenge by those entities charged with administration of the program." ( Star-Kist, supra,
Because the Water Authority is entitled to judgment on its declaratory relief cause of action declaring the RSI clause invalid and unenforceable as an unconstitutional condition, we need not address other possible grounds for striking the offensive provision. We need not decide whether the provision, although admittedly included in the water conservation program contracts with the "object, directly or indirectly" of insulating Metropolitan from suits for the violation of law, does not run afoul of Civil Code section 1668 because it does not "exempt" it from liability,
B. Attorney fees
The trial court found the Water Authority to be the prevailing party in the litigation and awarded it attorney fees of almost $9 million pursuant to a contractual fee provision contained in the parties' amended exchange agreement. ( Civ. Code, § 1717.) The award represents fees incurred through phase one of trial. The Water Authority asserts the trial court misconstrued the scope of the agreement's attorney fee provision in denying it an additional $2.6 million for prosecuting the second phase of trial.
Reversal of the judgment will necessitate a redetermination of the prevailing party on remand, as the Water Authority is no longer the possessor of a "simple, unqualified win." ( Hsu v. Abbara (1995)
The provision states, in relevant part, that no party shall seek to modify conveyance charges set under the agreement for a period of five years from its execution but that after the expiration of that time period, "nothing herein shall preclude [the Water Authority] from contesting in an administrative or judicial forum whether such charge or charges have been set in accordance
In denying the Water Authority's request for attorney fees incurred in the second phase of trial, the court found: "The fees clause here is highly idiosyncratic; it is not a general 'prevailing party' clause. It is narrowly drafted to cover attorneys' fees in cases challenging rates." The court determined the prevailing party "may only recover attorneys' fees for phase I of the case, which dealt specifically with rates," and not for phase II, which addressed whether Metropolitan breached the contract. Where, as here, interpretation of a contract "does not turn on the credibility of conflicting extrinsic evidence, the trial court's interpretation of the contract is a question of law we review de novo, or independently." ( Tribeca Companies, LLC v. First American Title Ins . Co. (2015)
We see no basis for denying fees incurred in the second phase of trial on the breach of contract claim. We agree with the trial court that the fee clause does not broadly cover all contract actions but is narrowly drafted to cover only claims challenging the rates charged by Metropolitan. We disagree, however, that the breach of contract claim here is not such a claim. The contract claim, like the claims tried in phase one, is founded on the assertion that Metropolitan's charges are unlawfully set. Section 5.2 of the water exchange agreement requires water transportation rates-the contract's price term-be "set in accordance with applicable law and regulation," permits the Water Authority to contest the lawfulness of those rates, and entitles the prevailing party to recover attorney fees incurred in prosecuting "such contest." The Water Authority's breach of contract claim is founded on this contractual provision. In the operative complaint, the Water Authority alleges Metropolitan "breached section 5.2 by setting rates for the conveyance of the Water Authority's purchased water that violate applicable laws and regulations." The contract price and water rates are one and the same. Proving breach of the price term necessarily includes a rate challenge.
The lawfulness of the charges imposed under the exchange agreement was not an issue confined to phase one. Metropolitan asserted throughout trial that its contractual charges were set in accordance with applicable law and regulation. In phase two Metropolitan argued there was no breach of contract because the parties understood charges set pursuant to "applicable law and regulation" included the State Water Project costs and water stewardship rate components, even if the components were invalid as applied to third parties.
We note, however, that neither the statutory preferential rights claim tried in phase two, nor the unconstitutional condition issue determined on summary judgment, are within the scope of the attorney fee clause. We leave to the trial court the task of appropriate allocation should this become necessary.
Disposition
The judgment is reversed and the peremptory writ of mandate vacated. The matter is remanded to the trial court for recalculation of damages, entry of declaratory relief on the Rate Structure Integrity clause, redetermination of the prevailing party, and other proceedings consistent with the views expressed in this opinion. The parties shall bear their respective costs and attorney fees incurred on the appeal and cross-appeal.
We concur:
McGuiness, P.J.
Siggins, J.
Notes
In the trial court, the Water Authority also contended that the rate violates parts of Proposition 13 (Gov. Code, §§ 50075, 50076 ) and the Metropolitan Water District Act (Wat. Code Appen., § 109-134 [all citations to Water Code Appendix section are to uncodified acts reprinted at 72B West's Annotated Water Code Appendix] ). The trial court deemed these provisions inapplicable and the Water Authority does not contest that conclusion on appeal.
The record on appeal is voluminous with an administrative record of approximately 30,000 pages and appendices exceeding 10,000 pages. We provide a summary of the pertinent facts.
An acre-foot of water is the amount of water that would cover an acre of land to a depth of one foot, which is 325,851 gallons.
Statutes governing wheeling are not restricted to direct delivery of a distinct volume of water but expressly permit commingled water provided "the transferred water is of substantially the same quality as the water in the facility" and "does not result in a diminution of the beneficial uses or quality of the water in the facility." (Wat. Code, § 1810, subd. (b).)
The critical provision of the amended exchange agreement reads as follows: "For the term of this agreement, neither [the Water Authority] nor Metropolitan shall seek or support in any legislative, administrative or judicial forum, any change in the form, substance or interpretation of any applicable law or regulation (including the Administrative Code) in effect on the date of this agreement and pertaining to the charge or charges set by Metropolitan's Board of Directors and generally applicable to the conveyance of water by Metropolitan on behalf of its member agencies; provided, however, that ... after the conclusion of the first five (5) years, nothing herein shall preclude [the Water Authority] from contesting in an administrative or judicial forum whether such charge or charges have been set in accordance with applicable law and regulation."
Water Code Appendix section 109-134 provides, in relevant part: Metropolitan's board "shall fix such rate or rates for water as will result in revenue which, together with revenue from any water standby or availability service charge or assessment, will pay the operating expenses of the district, provide for repairs and maintenance, provide for payment of the purchase price or other charges for property or services or other rights acquired by the district, and provide for the payment of the interest and principal of the bonded debt" Metropolitan incurs.
Metropolitan's wheeling rate applies only to wheeling by member agencies for up to one year; the charges for other wheeling transactions are negotiated. (Admin. Code, § 4119.)
The Water Authority sued Metropolitan and "all parties interested in the validity" of Metropolitan's 2011 to 2014 water rates. A number of Metropolitan member agencies entered the action on the side of Metropolitan and join in this appeal: The City of Los Angeles, acting through the Los Angeles Department of Water and Power; Municipal Water District of Orange County; City of Torrance; Las Virgenes Municipal Water District; West Basin Municipal Water District; Foothill Municipal Water District; Eastern Municipal Water District; Western Municipal Water District; and Three Valleys Municipal Water District. Additionally, member agency Upper San Gabriel Valley Municipal Water District has filed an amicus curiae brief in support of Metropolitan.
Damages were based on a rate adjustment. In 2011, one of the years at issue, Metropolitan charged transportation rates totaling $372 an acre foot ($204 system access, $127 system power and $41 water stewardship). The trial court found the lawful rate to be $136 an acre foot ($103 for system access after deduction of State Water Project costs, $33 for system power after deduction of State Water Project costs, and no amount permitted for water stewardship). This reduction in rates resulted in a damages recovery of over $188 million for years 2011 to 2014.
Metropolitan filed a separate notice of appeal from the attorney fee award. It seeks reversal of the judgment, which would set aside the award, but makes no claim of error as to the fee award itself.
The Water Authority also argues the contention is forfeited for failing to preserve it in the trial court and that Metropolitan should be judicially estopped from asserting the contention as it is inconsistent with a position taken in other litigation. (Evid. Code, §§ 452, subd. (d), 459, subd. (a).) We grant the October 28, 2016 request for judicial notice of the referenced litigation documents but reject the argument that Metropolitan's claim is procedurally barred. It does concern us that Metropolitan failed to include in its appellant's appendix the demurrer to the 2010 complaint and related documents addressing the issue but, nevertheless, we shall reach the merits of an essentially legal issue.
A recent case confirms that the wheeling statutes do not limit a conveyance owner's compensation to "incremental marginal costs." (Central San Joaquin Water Conservation Dist. v. Stockton East Water Dist. (2016)
The Water Authority claims earlier RMI reports are inconsistent with this conclusion but the cited material does not support the contention. The earlier reports simply state that Metropolitan purchases water from the State Water Project and include a chart of Metropolitan's projected expenditures. The cited pages have nothing to do with the functionalization of costs.
The estimated revenue requirement to pay Metropolitan's State Water Project expenses in fiscal year 2003 was supply $48 million, conveyance $127 million and power $107 million.
The Water Authority says this statement was "suborned" by Metropolitan. The consultant used language offered by Metropolitan executives to describe State Water Project charges but there is nothing to suggest the consultant did not freely embrace the characterization.
Metropolitan is correct in asserting that the holding here does not preclude it from including the water stewardship rate component in its full-service rate. The legality of the water stewardship fee as a component of Metropolitan's full-service water rate is not at issue here and we express no opinion on the matter.
The trial court's Proposition 26 finding concerned rates only for 2013 and 2014.
The Water Authority says Metropolitan failed to raise below the payor-specific services exception. In fact, the issue was fully briefed.
The parties each request judicial notice of court documents filed in connection with a request to depublish Newhall. (Evid. Code, §§ 452, subd. (d), 459, subd. (a).) We grant the unopposed requests filed August 3 and September 23, 2016.
"Each member public agency shall have a preferential right to purchase from the district for distribution by such agency, or any public utility therein empowered by such agency for the purposes, for domestic and municipal uses within the agency a portion of the water served by the district which shall, from time to time, bear the same ratio to all of the water supply of the district as the total accumulation of amounts paid by such agency to the district on tax assessments and otherwise, excepting purchase of water, toward the capital cost and operating expense of the district's works shall bear to the total payments received by the district on account of tax assessments and otherwise, excepting purchase of water, toward such capital cost and operating expense." (Wat. Code Appen., § 109-135.)
Article I, section 3(a) of the California Constitution provides: "The people have the right to instruct their representatives, petition government for redress of grievances, and assemble freely to consult for the common good."
Likewise, the United States Supreme Court has declined to decide whether government entities have First Amendment rights, or may assert an "unconstitutional conditions" claim. (United States v. Am. Library Assn., Inc. (2003)
See Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc. (1961)
Certain constitutional rights, like the "guarantees that all citizens enjoy equal protection of the laws and due process of law ... are not structural limitations on government power in the Supremacy Clause sense, but they are rights given to individual citizens which limit governmental power generally. Such rights accrue to individual citizens, not to units of government." (San Diego Unified Port Dist. v. Gianturco (S.D. Cal. 1978)
Civil Code section 1668 provides: "All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for its own fraud, willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law."
Concurrence Opinion
I join fully in Justice Pollak's opinion for the court, and write separately to express an additional reason why I believe the Rate Structure Integrity (RSI) provision in the contract between Metropolitan Water District of Southern California (Metropolitan) and the San Diego County Water Authority (Water Authority) is invalid. I believe it is unconstitutional for a different reason than the effect it may have on the right to petition for redress of grievances. In my view, it is inconsistent with the constitutional requirement that water rates be set in the manner prescribed by law because it seeks to evade the statutory scheme that governs the joint use of capacity in water conveyance facilities set forth in the wheeling statutes at division 2, article 4 of the Water Code (§§ 1810 - 1814 ). I would conclude it is unenforceable for this reason.
Our state Constitution provides that: "The right to collect rates or compensation for the use of water supplied to any county, city and county, town, or the inhabitants thereof, is a franchise, and cannot be exercised except by authority of and in the manner prescribed by law." ( Cal. Const., art. X, § 6.)
The wheeling statutes provide a basis for the Water Authority to use Metropolitan's conveyance facilities upon the payment of fair compensation. ( Wat. Code, § 1810.) But those statutes also make clear that "any determination made under this article" can be the subject of a judicial challenge in which "the court shall consider all relevant evidence, and the court shall give due consideration to the purposes and policies of this article." (