HomeMy WebLinkAbout2021-05-11; Municipal Water District; ; Authorization of Use of San Diego County Water Authority RefundMeeting Date:
To:
From:
Staff Contact:
Subject:
Districts:
May 11, 2021
President and Board Members
Scott Chadwick, Executive Manager
Vicki Quiram, General Manager
vicki.quiram@carlsbadca.gov, 760-603-7307
Ryan Green, Finance Director
ryan.green@carlsbadca.gov, 760-602-2414
Authorization of Use of San Diego County Water Authority Refund
All
Recommended Action
Adopt a resolution authorizing use of the San Diego County Water Authority refund to offset
the rates the Carlsbad Municipal Water District pays the Water Authority for water supply,
which will result in offsetting future customer rate increases.
Executive Summary
On March 4, 2021, the San Diego County Water Authority refunded $1,692,237 to CMWD. This
amount is CMWD’s share of contract damages awarded from the Metropolitan Water District
of Southern California to the Water Authority for rate charges that had been unlawfully
assessed between 2011 and 2014.
Under California’s Proposition 218, “Revenues derived from the fee or charge shall not be used
for any purpose other than that for which the fee or charge was imposed.” (California
Constitution, Article 13D, Section 6, (b)(2))1 Because of those limitations on how this refund
may be used, most of the other Water Authority member agencies plan to use their refunds to
offset future rate increases.
Staff recommends the board adopt a resolution to approve using the refund to offset the rates
CMWD pays the Water Authority for water supply. This will result in offsetting future customer
rate increases.
Discussion
CMWD is one of the Water Authority’s 24 member agencies. In its effort to ensure water
reliability, the Water Authority has continued to diversify the region’s water supply portfolio,
reducing its reliance on MWD to 11% of its water supply. The Water Authority filed lawsuits
between 2010 and 2018 challenging how MWD’s water rates and charges were imposed on the
1 Proposition 218, a constitutional initiative approved by voters in 1996, placed restrictions on how local
government agencies are financed.
May 11, 2021 Item #3 Page 1 of 10
Water Authority member agencies and their ratepayers. Exhibit 2 is a recent summary of the
multiple litigation issues.
On Jan. 13, 2021, the Superior Court in San Francisco County, entered a final judgment entitling
the Water Authority to $44,373,872 in damages and interest in addition to recovery of
attorney’s fees and costs in the first two lawsuits that challenged the rates and charges set by
the MWD.
The $44.4 million judgment was an award of contract damages for rate charges that had been
unlawfully assessed to the Water Authority between 2011 and 2014. Specifically, the MWD
overcharged on its water stewardship rates, which the Water Authority paid to transport its
independent water through MWD’s facilities. The attorney’s fees and costs have not yet been
determined. This final judgment caps a 10-year effort by the Water Authority Board of
Directors on behalf of San Diego County ratepayers. While the damages and interest award are
important, the judgment will also discourage future overcharges and, by doing so, minimize
future disputes.
On Feb. 25, 2021, the Water Authority board voted to refund each of the member agencies its
proportionate share of the $44.4 million received from the MWD for damages and interest. The
news release on that vote is included as Exhibit 3.
The Water Authority calculated each member agency’s refund based on the amount of
municipal and industrial water each agency purchased from 2011 to 2014, when the MWD
overcharged the Water Authority. Exhibit 4 contains the MWD rate case total refund allocations
of the $44.4 million.
On March 4, 2021, CMWD received a one-time payment of $1,692,237. To put this amount in
context, CMWD’s total projected operating revenue for fiscal year 2020-21 potable water is
approximately $45 million, so CMWD’s one-time refund is 3.8% of total operating revenue for
this year. If the board approves staff’s recommended use of the refund, CMWD will apply these
funds over a five-year period to offset future rate increases during that time.
Member agencies, including CMWD, have worked with their attorneys to analyze options for
the use of the refunded money. Of 24 agencies surveyed, 16 intend to use the refund to offset
future rate increases. Exhibit 4 includes how the 24 agencies plan to use the refunds. While
Proposition 218 limits how the refunds can be used, other options may include dedicating the
funds to the water Capital Improvement Program or refunding customers directly.
A direct refund to customers would present a heavy and perhaps infeasible administrative
burden for CMWD staff for at least two reasons. First, billing records are not available for the
full span of the 2011-2014 refund period. Second, many customers have moved and changed
addresses since that time. Accordingly, staff recommends that the refund be used for offsetting
the rates CMWD pays the Water Authority for water supply, which will result in offsetting
future customer rate increases even though other options for use of CMWD’s refund are
included in this staff report.
In their efforts to narrow other unfinalized lawsuits, the Water Authority’s attorneys continue
to work with the MWD to resolve the remaining legal issues. The Water Authority will distribute
the attorney’s fees and charges once the amounts are resolved.
May 11, 2021 Item #3 Page 2 of 10
Options
Staff provides the following options for the Board’s consideration:
1. Approve use of the Water Authority refund to offset the rates CMWD pays the Water
Authority for water supply, which will result in offsetting future customer rate increases
Pros
• Funds will be applied to offset future rate increases over a five-year period
• Consistent with intended actions of most other Water Authority member
agencies surveyed by staff
• Minimal administrative burdens on staff
• Water Authority supply charges represent largest portion of CMWD operating
budget, which therefore translates to largest portion of bill for ratepayers
Cons
• Ratepayers from 2011 to 2014 will not be reimbursed directly
2. Approve use of the Water Authority refund being dedicated to the water capital
improvement project
Pros
• Provides additional funding for the water capital improvement project, which
may indirectly offset future rate increases
Cons
• Indirect benefit will offset ratepayer bills less than option 1
• Ratepayers from 2011 to 2014 will not be reimbursed directly
• Additional review would be needed to identify appropriate capital improvement
projects most suitable to receive refund
Note: Most other Water Authority member agencies are not pursuing this option.
3. Approve use of the Water Authority refund to try to provide refunds to ratepayers from
2011 to 2014
Pros
• Of the three options, provides the most direct refund to ratepayers
Cons
• Some ratepayers from 2011 to 2014 may now have inactive accounts and new
addresses unknown to staff because of moves, business changes, etc.
• Administrative and financial costs to identify new addresses of inactive accounts
that were overcharged from 2011 to 2014 will dilute the benefit received by
those customers
• CMWD does not have access to ratepayer records prior to 2013 in the current
billing system, which was upgraded in 2020
• This burdensome option would adversely affect CMWD staff’s ability to perform
other required work
Staff recommends option 1 for board approval – approving use of the Water Authority refund
to offset the rates CMWD pays the Water Authority for water supply, which will result in
offsetting future customer rate increases.
May 11, 2021 Item #3 Page 3 of 10
Fiscal Analysis
The refund payment arrived in March 2021 and was recorded as revenue. It will be retained in
the water fund balance.
Next Steps
Staff will take the appropriate actions to apply the refund to offset the rates that CMWD pays
the Water Authority and the new balances will be considered in setting future rates during the
next Cost of Service Study.
Environmental Evaluation (CEQA)
This action does not constitute a “project” within the meaning of the California Environmental
Quality Act under Public Resources Code section 21065 in that it has no potential to cause
either a direct physical change in the environment or a reasonably foreseeable indirect physical
change in the environment and therefore does not require environmental review.
Public Notification
Public notice of this item was posted in keeping with the Ralph M. Brown Act and it was
available for public viewing and review at least 72 hours before the scheduled meeting date.
Exhibits
1. CMWD resolution
2. Fact Sheet – Water Authority-MWD litigation
3. News release dated Feb. 25, 2021
4. MWD rate case refunds and distribution of $44,373,872 for local water agencies
May 11, 2021 Item #3 Page 4 of 10
RESOLUTION NO. 1653
A RESOLUTION OF THE BOARD OF DIRECTORS OF THE CARLSBAD
MUNICIPAL WATER DISTRICT OF THE CITY OF CARLSBAD, CALIFORNIA,
AUTHORIZING USE OF THE SAN DIEGO COUNTY WATER AUTHORITY (WATER
AUTHORITY) REFUND TO OFFSET THE RATES THE CARLSBAD MUNICIPAL
WATER DISTRICT (CMWD) PAYS THE WATER AUTHORITY FOR WATER
SUPPLY, WHICH WILL RESULT IN OFFSETING FUTURE CUSTOMER RATE
INCREASES
WHEREAS, on March 4, 2021, the Water Authority refunded the CMWD an amount of
$1,692,237; and
WHEREAS, this amount represents CMWD's share of contract damages awarded from the
Metropolitan Water District of Southern California (MWD) to the Water Authority for stewardship rate
charges that MWD unlawfully assessed to the Water Authority between 2011 and 2014; and
WHEREAS, the CMWD Board of Directors (Board) of the City of Carlsbad, California has
determined it necessary and in the public interest to approve the use of the Water Authority refund to
offset the rates the CMWD pays the Water Authority for water supply, which will result in offsetting
future customer rate increases.
NOW, THEREFORE, BE IT RESOLVED by the Board of Directors of the Carlsbad Municipal Water
District of the City of Carlsbad, California, as follows:
1.That the above recitations are true and correct.
2.That the San Diego County Water Authority refund in the amount of $1,692,237 be used
to offset the rates the CMWD pays the Water Authority for water supply, which will result in offsetting
future customer rate increases.
//
May 11, 2021 Item #3 Page 5 of 10
PASSED, APPROVED AND ADOPTED at a Special Meeting of the Board of Directors of the
Carlsbad Municipal Water District of the City of Carlsbad, California on the 11th day of May, 2021, by
the following vote, to wit:
AYES: Hall, Blackburn, Acosta, Bhat-Patel, Schumacher.
NAYS: None.
ABSENT: None.
MATT HALL, PRESIDENT
]rn-spitivwc
BARBARA ENGLESON, SECRETARY
(SEAL)
May 11, 2021 Item #3 Page 6 of 10
FACT SHEET – ISSUES IN SDCWA/MWD LITIGATION1
What’s been decided so far?
a.MWD breached Exchange Agreement by charging its WSR2 on transportation (2011-14)
Damages + interest = $48 million (appx.3)
Suspension of collection of WSR (2018-2020) $45 million
b.MWD could include current SWP costs in its transportation rate (no damages awarded)4
c.MWD miscalculated preferential rights, about 100,000AF rights per year awarded to Water Authority5
d.MWD’s RSI6 clause illegal
Damages (restitution) TBD (still pending; see below)
What’s still pending?
a.MWD breached Exchange Agreement by charging its WSR on transportation (2015-17)7
Damages + interest = $32 million
b.Restitution for RSI years (2011-2017)8
Damages + interest = $64 million
c.Offsetting benefits of wheeled water supplies9 (2011-2020; $250/AF low estimate)
Damages + interest = $660 million
e.WSR on supply purchases (2018-2020)10
Damages + interest = $24 million
e.Attorney’s fees/costs = $15 million
1 MWD’s 998 offer proposes that the Water Authority agree to an amendment of the Exchange Agreement; however, no
amendment is at issue in the litigation, and thus is not shown here.
2 Water Stewardship Rate.
3 All dollar numbers are approximate.
4 The Water Authority had already paid the disputed rates.
5 This is not a damages issue; MWD has corrected its calculation of preferential rights. As a comparable for valuation of the 100,000
AFY of water, the Carlsbad Desalination Project cost about $1 billion to produce up to 56,000 AFY.
6 Rate Structure Integrity.
7 This issue was decided against MWD in the 2011-2014 cases but MWD claims it now has a new administrative record and therefore
wants to try the issue again.
8 Represents the difference between the Water Authority share of payments to fund WSR projects and benefits received with WSR
payments to Exchange Agreement netted out for the period indicated; does not include Water Authority’s claim for subsidies for
Carlsbad, though such LRP funding could be an alternative value for the same period. Overall, prior to adjustment for damages and
recent LRP contracts, the Water Authority to date has paid $170 million more to fund WSR programs than it has received in
benefits.
9 The wheeling statute requires MWD to calculate offsetting benefits but MWD refuses to do so even though the Court of Appeal
applied the wheeling statute to the Exchange Agreement.
10 The claim for WSR on supply charges for 2015-2017 is duplicative of the (b) restitution claim and so is not listed separately.
EXHBIT 2
May 11, 2021 Item #3 Page 7 of 10
4677 Overland Avenue, San Diego, CA 92123 News Release
Ed Joyce
(949) 276-1675 cellEjoyce@sdcwa.org
$44.4 Million in MWD Overcharges Being Returned to Local Water Agencies Rate cases move closer to closure with damages payment by MWD
February 25, 2021 – The San Diego County Water Authority’s Board of Directors today
announced a plan to distribute a rebate of $44.4 million to its 24 member agencies across the region after receiving a check for that amount from the Los Angeles-based Metropolitan Water District of Southern California to pay legal damages and interest.
The money resulted from the Water
Authority’s decade-long rate case litigation in state Superior Court seeking to compel MWD to set legal rates and repay overcharges. The Water Authority won several critical issues in
cases covering 2011-2014 and was deemed the prevailing party, which means the agency is also owed legal fees and charges in addition to the recent damages and interest payment
from MWD.
The court rulings will also help avoid future overcharges and thereby minimize future disputes over MWD’s unlawful Water Stewardship Rate for transporting the Water Authority’s independent water
supplies through MWD facilities. Those charges – if they had continued – would have cost San Diego County residents more than $500 million over the life of the Water Authority’s water delivery contract with MWD.
“This day has been a long time coming,” said Water Authority Board Chair Gary Croucher. “We never wanted to litigate these issues – but if we had not had the courage to do so, MWD would
still be collecting the illegal fees and we would not have money to give back to local retail water
agencies across the region.”
Per today’s decision by the Water Authority’s Board, the $44.4 million will be returned to member agencies in proportion to their overpayments between 2011-2014. The Water Authority
“This day has been a long time coming. We never wanted to litigate these issues – but
if we had not had the courage to do so,
MWD would still be collecting the illegal
fees and we would not have money to give back to local retail water agencies across
the region.”
Gary Croucher, Board Chair
San Diego County Water Authority
EXHIBIT 3
May 11, 2021 Item #3 Page 8 of 10
does not have a say in how member agencies use the refunds. The amount of legal fees and costs owed to the Water Authority is yet to be determined.
In addition to damages and interest, the rate case lawsuits generated other substantial benefits,
such as requiring an increase in the Water Authority’s preferential rights to MWD water by approximately 100,000 acre-feet a year, equivalent to about twice the annual production of the $1 billion Carlsbad Desalination Project.
In February 2020, the Water Authority’s Board of Directors voted to dismiss certain issues from
the litigation after securing more than $350 million in local project subsidy benefits for the San
Diego region. In doing so, the Water Authority acknowledged the MWD Board action to stop imposing its Water Stewardship Rate for transporting the Water Authority’s independent supplies, thus resolving for now that issue in future rate years.
As the lawsuits wind down, the Water Authority is working collaboratively with MWD member
agencies across Southern California to update MWD’s long-term water resource and financial
plans. MWD’s Integrated Resources Plan, known as the IRP, will be the agency’s roadmap for the future. The Water Authority is advocating for inclusion of updated data and plans by many MWD member agencies to develop local water supplies such as the Water Authority and its member agencies have done over the past two decades and will continue to do in the future.
# # #
The San Diego County Water Authority sustains a $245 billion regional economy and the quality
of life for 3.3 million residents through a multi-decade water supply diversification plan, major
infrastructure investments and forward-thinking policies that promote fiscal and environmental responsibility. A public agency created in 1944, the Water Authority delivers wholesale water
supplies to 24 retail water providers, including cities, special districts and a military base.
www.instagram.com/sdcwa
www.twitter.com/sdcwa @sdcwa
www.facebook.com/SanDiegoCountyWaterAuthority
www.youtube.com/SDCWAvideo
May 11, 2021 Item #3 Page 9 of 10
EXHIBIT 4
AGENCY REFUND AMOUNT USE OF SDCWA REFUND PAYMENT
Carlsbad MWD $1,692,236.88 To be determined
Del Mar, City of $108,025.65 Water Fund Contingency
Escondido, City of $1,754,022.94 Capital Improvement Program
Fallbrook PUD $909,412.67 Offsetting future rate increases / local supply development
Helix WD $2,847,389.34 Offsetting future rate increases
Lakeside WD $348,005.17 Capital Improvement Reserve Fund
Oceanside, City of $2,351,413.99 Offsetting future rate increases
Olivenhain MWD $2,039,332.40 Offsetting future rate increases
Otay WD $3,162,939.58 Offsetting future rate increases
Padre Dam MWD $1,157,551.53 Offsetting future rate increases
Pendleton Military Reserve $4,958.08 To be determined
Poway, City of $1,167,915.01 Offsetting future rate increases
Rainbow MWD $1,343,382.03 Offsetting future rate increases
Ramona MWD $596,663.83 To be determined
Rincon Del Diablo MWD $630,780.62 Will not be taking action until after Cost of Service Study
San Diego, City of $17,676,521.64 Will not be taking action until after September 2021
San Dieguito WD $368,002.42 Offsetting future rate increases
Santa Fe ID $748,699.93 Offsetting future rate increases
Sweetwater Authority - National, City of Offsetting future rate increases
Sweetwater Authority - South Bay ID Offsetting future rate increases
Vallecitos WD $1,590,623.74 Offsetting future rate increases
Valley Center MWD $1,332,471.26 Offsetting future rate increases
Vista ID $1,571,006.35 Offsetting future rate increases
Yuima MWD $98,149.47 Offsetting future rate increases
$874,367.74
May 11, 2021 Item #3 Page 10 of 10