Court Ruling Throws a Wrench in Two Big Upcoming Water Decisions

The San Diego County Water Authority – and San Diego ratepayers – were dealt a major legal loss this week that could leave local water customers back on the hook for billions of dollars over the next several decades.

For years, San Diego water officials have argued the region’s major supplier of water – the Metropolitan Water District of Southern California – charges too much to deliver water to San Diego from the Colorado River.

In 2015, a lower court judge sided with the Water Authority.

But, this week, an appellate court sided with Metropolitan: A three-judge panel from the 1st District Court of Appeal found San Diego water customers are, by and large, paying their fair share to use a statewide water delivery system.

The Water Authority will ask the state Supreme Court to reexamine the appellate court’s decision, so the loss is by no means certain.

But this week’s ruling creates wrinkles of its own, even if it’s eventually overturned in the Water Authority’s favor.

At very least, the ruling is a momentary setback for the Water Authority at crucial time in California water policy and politics. The Water Authority has two major decisions to make by the end of the year and the ruling plays some part in each of them.

By fall, the Water Authority will likely have to decide whether it will support Gov. Jerry Brown’s controversial plan to ensure Southern California can continue taking water from Northern California. By the end of the year, the Water Authority must also decide whether it will continue to buy water it has long argued it is overpaying for.

The Water Authority buys water from Metropolitan and then resells that water to local water agencies across San Diego, like the city of San Diego’s Public Utilities Department. That simple-sounding relationship is the breeding ground for a long-running series of disputes between the Water Authority and Metropolitan.

The Water Authority recently stepped up a public relations campaign designed to damage Metropolitan’s reputation. Part of that campaign involves going after Metropolitan for supposedly illegal rates – rates that the court this week said were largely legal.

The court case revolves around a deal the Water Authority made to buy Colorado River water from another water agency in Imperial County, the Imperial Irrigation District. That deal was the largest water purchase of its kind in United States. It’s one of several reasons that San Diego’s water rates are among the highest in the country.

When it bought the water, the Water Authority had no way of getting the water to San Diego without using an aqueduct owned by Metropolitan.

The two were unable to agree on how much Metropolitan could charge to deliver the water, setting the stage for the court battle.

Metropolitan has two straws that bring water into Southern California – the aqueduct that brings in water from the Colorado River, and the State Water Project, the system of canals, pipelines and reservoirs that brings in water from Northern California.

Metropolitan says the two straws are one system, so when the Water Authority wanted to use one straw to get its Colorado River water, it still had to pay for the upkeep of both.

The Water Authority argued it shouldn’t have to pay fees associated with both if it’s only using one. Since the State Water Project is more expensive to maintain, the Water Authority argued San Diego was going to be overcharged by up to $7.4 billion over the next several decades.

The 1st District Court of Appeal disagreed. While the Water Authority won some smaller victories in the case, they amounted to perhaps $1 billion in the next several decades, or about $6 billion less than the Water Authority had hoped.

Jeffrey Kightlinger, Metropolitan’s general manager, said the ruling was a victory for his agency’s approach, which is to be the regional behemoth responsible for ensuring 19 million Californians have enough water.

The Water Authority has been trying to distance itself from Metropolitan since the early-1990s, when Southern California was gripped by a major drought that Metropolitan was unprepared for.

Since then, the Water Authority has gone in search of water to call its own. The deal with the Imperial Irrigation District allowed the Water Authority to buy enough Colorado River water for roughly 1.6 million people. Then, the Water Authority helped open the largest desalination plant in the country, in Carlsbad.

The Water Authority calls the water it gets from Imperial County its own “independent” supply of water, even though it relies on Metropolitan to get that water to San Diego and may now be forced to pay a price partially set by Metropolitan that it believes is unfair.

“In the end, years of litigation brought by the Water Authority and tens of millions of dollars in related costs borne by ratepayers have fundamentally changed no major aspect of Southern California water management or financing,” Kightlinger said in a statement. Of course, that assumes the Supreme Court won’t step in and side with the Water Authority.

Whatever happens, the Water Authority has two major decisions to make, and they may need to be made before it’s clear what the Supreme Court will do.

By the end of the year, the Water Authority must decide if it wants to keep buying Colorado River water from Imperial County. Right now, the deal is set to continue through at least 2047, but the Water Authority has the option this year of ending the deal a decade earlier. If it concludes the water will be too expensive, it may walk away from the deal.

The Water Authority will know by the end of September whether the California Supreme Court will consider the case against Metropolitan. If the high court declines, this week’s ruling will be the final word on the matter and the Water Authority will know the water is going to be more expensive than it hoped. If the court does take the case, there may not be a ruling for another year or more, so the Water Authority is going to have to decide without knowing for certain what price it will be paying for water.

“Then the board will be faced with imperfect information or some uncertainty as to what the ultimate outcome of this will be,” said Dennis Cushman, the Water Authority’s assistant general manager.

The second major decision involves the State Water Project: The Water Authority will have to take a firm position in coming months on the governor’s plan to build underground tunnels in Northern California to help ensure water keeps coming south through the State Water Project. The price tag would be at least $17 billion for the entire state, though it’s unclear how much of that San Diego would bear.

The Water Authority had hoped to avoid some of those costs. The court ruling this week wouldn’t allow that. Instead, some of those expenses will be heaped on top of the already high price San Diego pays to get the Colorado River water from Imperial County.

The Water Authority tried to put a positive spin on its multibillion-dollar court loss this week, noting that there were other elements of the case that it won. Those things do add up to hundreds of millions, if not more than a billion dollars: The appellate court knocked Metropolitan for unfairly withholding subsidies from San Diego for certain local water supply projects – money that could have helped reduce the cost of the expensive desalinated water that San Diego now buys. The court also said hundreds of millions of dollars in charges Metropolitan passes onto San Diego are inappropriate. And, the court said San Diego should have more preferential access to certain Metropolitan water supplies.

But all that pales in comparison with what the Water Authority lost this week. Cushman, for instance, acknowledged that court did not side with the Water Authority when it came to most of the money at stake.

That did not stop San Diego Mayor Kevin Faulconer from calling the appellate court ruling “very good news.”

The court itself didn’t see it that way. In one section of the ruling related to attorney’s fees, the justices wrote, “the Water Authority is no longer the possessor of a ‘simple, unqualified win.’”

On Thursday, the Water Authority’s board voted to give $4 million more to the lead law firm on the case, Keker, Van Nest & Peter, a San Francisco-based firm.