(CN) – A California appeals court dealt San Diego’s water provider a major blow on Friday after it ruled a lower court erred in awarding millions in damages due to a series of apparent overcharges.
The California First District Court of Appeal found that the Metropolitan Water District of Southern California, which supplies water to most Southern California residents, abided by regulations in charging the San Diego County Water Authority for water it delivered to the agency from the Colorado River.
The appellate court reversed a lower court order that found Metropolitan had consistently overcharged the Water Authority over a four-year period and awarded San Diego’s water purveyor about a quarter billion dollars in damages.
“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,” the three-judge panel wrote in a 55-page opinion.
The Water Authority has been paying the disputed charges for years, and Metropolitan is required to hold those amounts in a separate account, according to a Water Authority spokesman.
The decision also underscores the precarious nature of the water supply in Southern California, where enormous populations and industry exist in an arid environment that almost utterly depends on water deliveries from Northern California and the Colorado River.
The California Legislature established Metropolitan in 1928 with the intent of dividing up water supply that comes from two principle sources — Northern California, where the Sacramento and Feather Rivers convey snowmelt down from the Sierra Nevada, and the Colorado River, which flows through Colorado, Utah, Arizona and California on its way to the Gulf of California.
The water organization sets water rates and allocations for all the major metropolitan areas in Southern California, including Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura counties, which have a combined population of about 19 million.
San Diego County alone depends on water from both sources to support its population of 3.3 million and an area economy of $222 billion.
Many of the states along the Colorado River seek to use its waters to serve cities and agricultural operations, meaning disputes have historically arisen in the West about who is entitled to what — culminating in a Supreme Court case that held California was allowed 4.4 million acre feet of water.
Of that amount, the San Diego County Water Authority was entitled to about 550,000 acre feet and received the rest from Northern California. But the Imperial Irrigation District, which serves the Inland Empire to the east of Los Angeles, often did not use its full allocation and sold its excess water to San Diego.
San Diego was a willing buyer but had to rely on Metropolitan’s infrastructure to physically deliver the water, so the agencies came to an agreement.
In 2003, Metropolitan altered its rate structure from a fixed rate to a rate that incorporated the costs of delivery, including transportation costs.
In 2010, the Water Authority sued Metropolitan, believing it was being systematically overcharged and claiming Metropolitan was not adhering to regulations that stipulated how water agencies are to charge for transporting water, also referred to as “wheeling.”
While a lower court ruled in favor of the Water Authority, the appellate court ruled that San Diego customers are essentially paying a reasonable amount for the water delivered to the community.
The Water Authority issued a statement Friday saying they would appeal the decision.
“With so much at stake, we expect that both the Water Authority and MWD are likely to seek review from the California Supreme Court of various aspects of today’s decision,” said Mark Muir, chair of the Water Authority’s Board of Directors.
Meanwhile, Muir celebrated aspects of the appellate decision, saying it did not represent a total loss for the district.
“One key ruling is that the Water Authority is entitled to tens of thousands of acre-feet more water from MWD than MWD had calculated under its preferential rights formula – a benefit valued in the hundreds of millions of dollars based on payments made by the Water Authority,” Muir said. “Another is that MWD collected millions of dollars in illegal charges from San Diego ratepayers.”
Indeed, the panel did rule that Metropolitan charged the Water Authority a stewardship rate, or a conservation fee, for transporting water, which is unlawful.
Jeffrey Kightlinger, general manager of the Metropolitan Water District of Southern California, celebrated the decision that skewed largely in his organization’s favor.
“The Water Authority’s years-long effort to shift costs relating to their own water supply onto ratepayers elsewhere in Southern California has failed,” he said. “We are equally pleased the court upheld Metropolitan’s full service rate—which represents the vast majority of Metropolitan’s revenues— including our ability to fund projects advancing conservation and local resource development through that rate.”
The decision and ensuing battle comes at a time of reckoning for Southern California water agencies, as they must decide whether to support Governor Jerry Brown’s plans to build two giant tunnels to convey water from the northern end of the state to the southern in coming months.
In the meantime, the court battle is likely headed to the state’s highest court.