Billions of dollars at stake over County Water Authority, MWD legal battle

REGION — “Whiskey is for drinking, water is for fighting.”

Whether or not Mark Twain coined the term, the axiom rings true, especially in the West and specifically the water war between the San Diego County Water Authority (SDCWA) and the Los Angeles-based Metropolitan Water District of Southern California (MWD).

The battle raging between the two entities has resulted in higher water rates for customers in San Diego County.

In November, the Carlsbad Municipal Water District Board of Directors (the City Council), approved rate increases stemming from a cost of service study. The study, though, was influenced by the rates from the MWD, according to Carlsbad Finance Manager Aaron Beanan.

“I sympathize with what everyone is saying,” Carlsbad Mayor Matt Hall said. “I have six water meters. When water goes up, I pay six fold. In California, given the cost of energy, given the cost of environmental regulation and a whole host of things, trying to keep water under a 4 or 5 percent increase a year is almost impossible to do.”

MWD is a regional water wholesaler delivering to 26 agencies — 14 cities, 11 municipal water districts and one county (San Diego) water authority. MWD supplies more than 19 million people with water and is the largest distributor of treated drinking water in the country.

The massive entity has a 38-person board of directors with SDCWA represented by Keith Lewinger, Elsa Saxod and Fern Steiner.

“The story of the water rate increases starts about 100 miles north in downtown Los Angeles,” said SDCWA Assistant General Manager Dennis Cushman of MWD. “We also pay Metropolitan to transport our independent Colorado River supplies.”

The MWD sells water to the SDCWA, who then sells to 24 other agencies throughout the county. As such, those entities base their rates off the cost of water, deliveries and other factors from SDCWA and MWD.

However, the SDCWA filed its first lawsuit against the MWD several years ago for illegal charges of rates for use of the Colorado Aqueduct. A state judge ruled in favor of SDCWA in November 2015 for illegal rate charges from 2011-14 and awarded $243 million in damages, costs, pre-judgment interest and attorney’s fees.

It was the largest plaintiff’s award in civil litigation in the state in 2015, according to Cushman.

The MWD, however, appealed the ruling to the California State Supreme Court.

But the SDCWA filed its fourth lawsuit in April alleging MWD used the same “scheme” when setting its rates for 2017 and 2018. SDCWA alleges MWD overcharged by more than $134 million and combined with the previous suit, the total is estimated to be at $524 million, not including interest, court costs and attorney’s fees.

MWD’s appeal, however, is expected to be heard in early 2017 with a ruling coming later in the year.

“There isn’t much to talk about,” said MWD spokesman Armando Acuna. “There’s really nothing to say. We just have to wait for the outcome of the appeal.”

But in the meantime, many residents, businesses and agriculture industries are seeing higher rates due to the alleged infractions of MWD.

Still, MWD is pushing forward with its rate increases for 2017-18 and will raise costs by 12.1 percent. The trickle-down effect has become more of a waterfall and residents are upset.

According to the MWD website, it states that the new rate increases are 4 percent overall for the next two years. Acuna said the rise in cost includes transporting the water through MWD’s system.

As for the 12.1 percent claim by SDCWA and its other agencies, he said he did not know where those numbers originated.

“We’re in the midst of a two-year budget,” Acuna added. “I don’t know where that (12.1 percent) came from. It’s 4 percent,” he said.

In Carlsbad, the CMWD approved a 4.85 percent increase ($4.91) for 2017 and an additional $3.29 in 2018 for potable water. The costs were calculated by using the average user in the district.

To reduce further financial burdens to its customers, the CWMD dipped into its water operations reserve account using $2 million to keep the rate increase below five percent. Even as Hall and Beanan explained the process, the city received 137 protest letters and several residents spoke in opposition to the rate hike during last week’s city council meeting.

SDCWA, meanwhile, dropped $20 million out if its reserve fund to soften its spike. For 2017, the SDCWA increase is 5.89 percent.

“We have done more in San Diego than any other agency anywhere,” Hall explained, “because we are at the end of the pipe. We know what it’s like to have a pipe go dry.”

In 1991, it was one of the driest years on record and Carlsbad was reliant on MWD for about 85 to 90 percent of its water. So, the wheels were set in motion to construct a desalination plant, which opened in December 2015.

Also, the CWMD and county made an agreement to buy water from the Imperial Irrigation District in East County. CWMD also spent billions on lining canals, storage facilities plus the desalination plant.

“They (MWD) started using a rate structure or methodology that was not fair to all,” Hall explained. “All through the late-90s and into the 2000s we tried to negotiate, we tried everything humanly possible to try to get them to understand that their rates have had a nexus in order for them to charge us whatever they’ve charged us. They have literally overcharged billions over time.”

Carlsbad breakdown and portfolio

The rate increases approved cover 2017 ($4.91) and 2018 ($3.29) and for a combined $8.20 over the next two years for potable water. Potable water is delivered from Northern California and the Colorado River through a web of canals and aqueducts, the final leg of which is own by the MWD.

As for recycled water, those rates will also increase by $68.24 in 2017 and $55.89 in 2018 for a two-year total of $124.13.

Recycled water, though, is primarily used for agricultural purposes and watering city landscaping.

Customers, though, do get a respite, as their wastewater fees will not increase over the next two years.

Since 2009, however, the rate increase percentages have dropped drastically for potable and recycled water.

On Jan. 1, 2009, the city raised rates by 20 percent for potable water and by about 17 percent on Aug. 1, 2009, and Jan. 1, 2010. Jan. 1, 2012, was the last time the rates were increased by double-digits when it was 10 percent.

As for recycled water, those rates increased between 17 to 25 percent from Jan. 1, 2009, through 2011. In 2012, a 10 percent spike was incurred and since those rates have fallen from 7.5 percent to 4.85. In 2018, the increase will be 4 percent.

Carlsbad’s water portfolio, meanwhile, has expanded drastically in the past three decades. In the early 1990s, more than 90 percent of its water was imported.

Today, 54.5 percent of water is purchased through the SDCWA, which also forces rates to increase as the cost of operations and maintenance of the system must be taken into account.

Recycled and desalinated water currently make up 45.6 percent of the portfolio, but is projected to dip slightly to 43.3 percent by 2040.

Although rates increased when the Carlsbad Desalination Plant went online in 2015, the city estimates those rates will decrease in about 10 years.

Where does the money go?

CWMD uses 67 percent of its potable budget to purchase water, while the 12 percent is used for replacement, 11 percent for operations and maintenance and 10 percent on personnel. Those figures are for both fiscal year 2015-16 and 2016-17.

The recycled water budget, meanwhile, uses 26 percent for water purchases, 24 for debt service, 15 for personnel, 14 for replacement, 11 to Encina and 10 percent for operations and maintenance for FY 2015-16.

As for FY 2016-17, 24 percent of funds go to debt service, 20 percent to water purchases, 18 for personnel, 15 to replacement, 13 to Encina and 10 for operations and maintenance.

Finally, wastewater funds are directed into four categories. Replacement takes 34 percent followed by Encina with 27, O&M at 20 and personnel with 19 for FY 2015-16.

In FY 2016-17, 35 percent flows into replacement followed by 28 to Encina, 20 percent for O&M and 17 to personnel.

Escondido’s place

North County’s largest city, meanwhile, is a bit different from the coastal communities in its share of the county water network.

According to Chris McKinney, director of Public Utilities in Escondido, the city imports most of its potable water and receives no allotment from Carlsbad’s desalination plant because Escondido is a raw (untreated) water purchaser. The city treats the liquid at the Hale Avenue Resource Recovery Facility (HARRF) station before pumping it for use.

McKinney said the city still benefits because it increases the system’s reliability, which allows Escondido a slightly larger slice of imported water because others have the sustainability of desalinated water.

“The water authority is by the biggest supplier of our water,” McKinney said of the SDCWA. “Even in a wet year, they are probably three-quarters of our water supply.”

Like Carlsbad, Escondido is also heavily investing in reclaimed water. Currently the city receives 4 million gallons of recycled water per day, but ongoing long-term projects throughout the city will increase the total to 12 million gallons per day, McKinney said.

Although the finished project will not be “fully” executed for about 15 to 20 years, McKinney said the added water supply will also be treated for potable use, which then will allow the city to reduce its purchase orders. The upgrades will cost about $275 million.

Of course, the recycled potable use is dependent on the state approving the project, among other factors.

“It will save us an enormous amount of money,” McKinney said of the pending project.

And while rates may not decrease, McKinney said it’s due to those project costs, maintenance of facilities, pipes, debt service and personnel.

The city purchases water from the county and MWD via the Colorado River and Northern California sources.

Escondido portfolio

As an agency, Escondido represents slightly more than 3 percent of SDCWA deliveries. In total, Escondido purchases about 95 percent of its raw water from SDCWA. The city then pumps it to its facilities for treatment.

Ongoing litigation between SDCWA and MWD, McKinney said, is not a huge driver in rate increases for Escondido. Instead, capital improvements such as building and repairing infrastructure from pipes to plants are factors in rate increases.

Over the past five years the increases have been driven by the need to maintain debt service ratios.

“Obviously, for any agency to be financially healthy you need to have enough income to cover your debt payments,” McKinney said. “We have minimum requirements from our bondholders to have a certain amount of revenue in excess of our expenses.”

In 2011-12, debt drove those increases, but currently McKinney said it is not the case.

However, as new infrastructure brings new debt, McKinney said the city is more careful over costs, rate increases, revenue and other financial aspects to cover the debt.

If the litigation holds, Escondido would receive about $1.25 million per year for the years under dispute, McKinney explained.

“We could be getting a several million dollar payment if the county water authority is ultimately victorious,” he added. “However, that is money we are not counting on getting. We don’t budget for it. If we get it … perhaps that would mean we wouldn’t have to raise rates as much in the future.”

The San Luis River basin makes up from 2 to 3 percent to up to 40 percent in a wet year of the city supply, with a 25 percent average. The remainder is from the SDCWA.

Of course, the city is engaged in an aggressive recycled water expansion. The problem is about 85 percent of their recycled water feeds a San Diego Gas & Electric power plant for cooling.

The recycled water expansion, meanwhile, is driven by two factors.

First, the outfall for treated wastewater, which the city is outgrowing, cannot handle the scale of water. In short, the pipe is too small as the city population continues to grow.

“It would be too expensive and probably impossible from an environmental perspective to build a bigger pipe,” McKinney added. “By redirecting that water back into town, we avoid spending more than half-a-billion dollars on a new … pipeline.”

The expansion program will generate revenue by selling recycled water along with spending less money on imported water.

“Over the next 30, 40, 50 years the city will reap a lot of benefits, a lot of savings, frankly,” McKinney said.

Another project

From 2010’s rates to the current rates, Hall estimated the overcharge per year is $100 million.

The money from the judgment was put into an escrow account, not to be touched, with at least 7 percent interest, the mayor added.

The rate increase is just for water, Hall said, stressing no money is for operations, maintenance, personnel, electricity and other portions for the bill.

As for the future of the litigation, Hall said the CWMD is “reluctant” to discuss possible outcomes, even with one judgment in favor of SDCWA.

“You never know what a judge is going to say,” he explained. “In the best-case scenario and when the smoke clears and use what this judge is awarding, it will probably be between $700 million to $750 million.”

Desalinated water is one more supply, which would also not figure into any state mandated cutbacks as seen in 2015-16. Seven percent of the county’s supply is from desalinated water, while Carlsbad’s take is between 7 to 10 percent. Carlsbad buys 2,500-acre feet per year from the plant.

Recycled water, meanwhile, makes up for at least 30 percent of the city’s portfolio.

The city has spent about $92 million in the past 20-plus years to increase its reclaimed water, which filters up the ladder for fewer purchases from the SDCWA and MWD for imported water.

The county portfolio is about 40 percent from MWD and is expected to decrease by 2020.

While Hall is hesitant to discuss rate decreases, he noted it might not be a possibility due to another massive project.

Another cost that could soon come is from the Twin Tunnels project, also known as California WaterFix, in Sacramento.

With an estimated $15.7 billion price tag, the plan is to lay two tunnels, four stories high for 35 miles under the Sacramento-San Joaquin River Delta in Northern California, according to reports from the Associated Press.

The AP stated the project could “dwarf” the English Channel tunnel and Boston’s Big Dig.

The Twin Tunnels would deliver water to Southern California users and payment would come from those cities and farmers.

If approved, construction would begin in 2018 and take 10 years, according to KCRA 3 TV station in Sacramento.

“Depending on your perspective on climate change … it begs the question how do you keep the delta water reliable for 50 years?” Hall asked.

SDCWA’s challenges

Rate increases from MWD have had a “profound impact” on SDCWA rates, which trickles down to member agencies, from MWD water supplies and transportation rates, Cushman said.

In addition, he railed against MWD’s “monopoly” on transportation from the Colorado River to San Diego County.

SDCWA has studied proposals to build its own aqueduct from the county to the Colorado River, but the significant cost and the fact that SDCWA is the largest investor in the MWD aqueduct makes the option difficult to green light.

“We’ve already paid for a system of pipelines and aqueducts,” Cushman said.

The litigation is a fight over prices paid for transporting the independent Colorado River supply purchased from IID, not the water bought from MWD.

“That’s the litigation we’ve already won at the Superior Court level,” Cushman said. “We have eight years under litigation.”

According to Cushman, MWD is governed by the law, state Constitution and the legislature, which is not a regulatory agency. MWD is not regulated by any state agency, while its rates are governed by the state Constitution, he added.

“Public water agencies such as Metropolitan, such as the water authority, cannot charge any more for any service we provide than the cost of service,” Cushman explained. “So ratemaking is legally founded in the principle of cost of service. It is actually ensconced in the California Constitution. It’s what we’ve been fighting for on the behalf of Carlsbad and the rest of our 24-member agency.”

Over the past 10 years, MWD has more than doubled the cost of treated water and its service areas, Cushman said.

“Their justification, as they’ve said in court over several trials and the litigation, is that whatever the majority of the board votes on is the law,” he added. “That’s simply not true … and that they are exempt from the California Constitution requirements for cost of service. There is a Latin phrase for it called, ‘Ipse Dixit.’ Ipse Dixit means, ‘because I said so.’”

If litigation holds, even on appeal to the state Supreme Court, Cushman said there are two avenues.

One is amount of money, with interest, illegally collected must be returned to the SDCWA. If victorious, the SDCWA will deduct legal expenses that have not been recovered from MWD and then refund the balance to the 24-member agencies in direct proportion to their share of the overcharges.

“They would each get a check back from the water authority for significant numbers,” Cushman said.

Secondly and more importantly, he added, MWD would be forced to reform its water rates and charge only legal rates.

Over a 45-year period, Cushman said it would save SDCWA between $4 billion to $7 billion “that we won’t have to charge to our member agencies.”

It would also be a significant decrease to SDCWA’s wholesale water rate to member entities.

“The overall stakes in the litigation, between $4 billion to $7 billion probably makes it one of the biggest in state history,” Cushman said.