San Diego County Water Authority v. Metropolitan Water District of Southern California

Metropolitan Water District of Southern California (Metropolitan) appeals a

judgment holding that the rate it charges for transporting water, or “wheeling,” violates

numerous provisions of law and awarding the San Diego County Water Authority (Water

Authority) substantial damages for having charged that rate in breach of a water

exchange agreement between the two agencies. The Water Authority cross-appeals,

disputing the trial court’s decision upholding a provision in water conservation program

contracts between the two parties that penalizes it for participating in litigation or

supporting legislation to challenge or modify Metropolitan’s existing rate structure.

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) 80

Cal.App.4th 1403 (Imperial Irrigation) it was held, and the parties do not dispute, that the

2

“wheeling statutes” (Wat. Code, § 1810 et seq.) do not as a matter of law prohibit the

allocation of system-wide transportation costs to reasonable wheeling charges, so that

wheeling rates need not be limited to the marginal cost of transporting water over the

facilities used in a particular transaction. The trial court here held that although

Metropolitan is required to pay its pro rata share of the costs of maintaining the

California Aqueduct, these costs may not be considered in calculating Metropolitan’s

wheeling charges, essentially because Metropolitan does not own the aqueduct. We

conclude this was error. The inclusion of Metropolitan’s system-wide transportation

costs, including transportation charges paid to the State Water Project, in the calculation

of its wheeling rate does not, as the trial court held, violate the wheeling statutes,

Proposition 26 (Cal. Const., art. XIIIC, § 1, subd. (e)), Government Code section

54999.7, subdivision (a), the common law, or the terms of the parties’ exchange

agreement.1 We do agree with the trial court that the allocation of “water stewardship”

charges to the wheeling rate is improper and that the Water Authority is entitled to

recover the overcharges that resulted from inclusion of those charges in the rate charged

by Metropolitan.

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.



1

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.

3

I. Factual Background2

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.

A. California’s Water Supply

“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) 182 Cal.App.3d 82,

98.) Regionally, most of California’s rain and snow falls in the north while most of the

demand arises in the south. (Ibid.) There is also an unequal distribution by season as

precipitation occurs in the winter while demand is highest in the hot and dry summer

months. (Ibid.) Precipitation also varies widely year to year. California has addressed its

variable and uneven distribution of water resources by establishing an extensive water

supply system to store and move water where and when it is needed. (Assoc. of Cal.

Water Agencies, California’s Water: California Water Systems



[as of June 21, 2017].) Over 1,000 reservoirs, “dozens of local and regional

water conveyance systems” and “[s]even major systems of aqueducts and associated

infrastructure exist today to capture and deliver water within the state.” (Ibid.) This water

supply system is managed by a network of agencies on federal, state, regional and local

levels.



2

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.

4

B. Metropolitan

Metropolitan was established by the California Legislature in 1928. (Imperial

Irrigation, supra, 80 Cal.App.4th at p. 1415.) “Its mission is to combine the financial

resources of cities and communities in Southern California and to bring supplemental

water to the area.” (Ibid.) Initially, Metropolitan was formed “to construct and operate the

242-mile Colorado River Aqueduct” to transport Colorado River water to the area. (The

Metropolitan Water Dist. of So. Cal., Who We Are, MWD ACT & Code

[as of June 21,

2017].) “Concurrent with the enactment of the Metropolitan Act, the U.S. Congress

passed the Boulder Canyon Project Act, authorizing construction of Hoover Dam, which

provided power to pump water to Southern California.” (Ibid.) Today, Metropolitan

imports water from two principal sources, the Colorado River, using its Colorado River

Aqueduct, and Northern California via the state-owned California Aqueduct.

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 [as of June 21, 2017].) Metropolitan’s member agencies provide “water to

more than 19 million people in Los Angeles, Orange, Riverside, San Bernardino, San

Diego and Ventura counties.” (Ibid.) “Metropolitan currently delivers an average of 1.5

billion gallons of water per day to a 5,200-square-mile service area.” (Ibid.)

The board of directors “sets policy and guides the actions” of Metropolitan.

(Imperial Irrigation, supra, 80 Cal.App.4th at p. 1416.) The member agencies govern

Metropolitan through their representatives on its board, with each agency appointing its

own representatives. (See Wat. Code Appen., §§ 109‐50, 109‐51, 109‐55.)

Representation is proportional based on the taxable property value in each member

agency’s service area, although each agency is entitled to a minimum of one board seat.

(Wat. Code Appen., §§ 109‐51, 109‐52.) The City of Los Angeles has the most directors

5

with the Water Authority close behind. (Metropolitan Water Dist., supra, at pp. 1415-

1416.)

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 [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 San Diego region’s aqueduct delivery

system, which consists of approximately 300 miles of large-diameter pipeline in two

aqueducts, 1,600 aqueduct-related structures, and over 100 flow-control facilities,

occupying 1,400 acres of right-of-way.” (San Diego County Water Authority,

Construction, Facilities & Operations [as of

June 21, 2017].)

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 Sacramento-San Joaquin Delta. It is lifted by the Delta Pumping

Plant into the California Aqueduct, and the aqueduct conveys it south.” (Goodman v.

County of Riverside (1983) 140 Cal.App.3d 900, 903.) The California Aqueduct is

approximately 444 miles long and conveys water to four delivery points near the northern

and eastern boundaries of Metropolitan’s service area.

6

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, fn. omitted.) The payments under these contracts pay for

project operating costs and the public bonds issued to build the system. (Id. at p. 905.)

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 ArizonaNevada

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) 373 U.S. 546, 552.)

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, supra, 373 U.S. at pp. 560-

561.) Metropolitan built the Colorado River Aqueduct to take delivery of its Colorado

River water at Arizona’s Lake Havasu and transport it to Southern California. Disputes

7

among the states over Colorado River water continued until 1963, when the United State

Supreme Court held that California was entitled to a basic allotment of no more than 4.4

million acre-feet per year.3

(Id. at p. 565.) “[T]he court’s resolution of the dispute

between the states—which limited California’s share of the river to far less than the state

can use—ensured the fight would continue within the state for years to come.”

(Quantification Settlement Agreement Cases (2011) 201 Cal.App.4th 758, 772 (QSA

Cases).)

“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, 201 Cal.App.4th at p. 783.) The Seven-Party

Agreement apportioned more than California’s basic allotment because, “for years after

the United States Supreme Court determined that California’s share of the water from the

Colorado River was to be only 4.4 million acre-feet during normal water years, California

was nonetheless able to use much more than that because Arizona and Nevada were not

yet able to use their full entitlements.” (Id. at p. 773.)

Parties to the Seven-Party Agreement included Metropolitan and the Imperial

Irrigation District (Imperial). (QSA Cases, supra, 201 Cal.App.4th at p. 784 & fn. 8.) The

agreement “apportioned Colorado River water among the various parties by priority but

without quantifying exactly how much water each party was entitled to receive.” (Id. at

p. 785.) Under the agreement, Imperial was the largest single holder of water rights with

priority over Metropolitan. (County of Imperial v. Superior Court (2007) 152



3 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.

8

Cal.App.4th 13, 19.) Of the 4.4 million acre-feet of water allocated to California,

Metropolitan was entitled to only 550,000 acre-feet. The Water Authority possessed no

Colorado River rights. (Ibid.) This priority system led to conflicts among the water

agencies. (Ibid.) Imperial, which had more water than it needed, sought to sell its excess

water to others while Metropolitan maintained that any excess should be made available

to it under the priority system. (Id. at pp. 19-20.) Ultimately, Imperial’s position

prevailed, permitting Imperial to sell its excess water to other agencies, such as

Metropolitan and the Water Authority.

“Although the state has broad power under the public trust and reasonable use

doctrines to order the reallocation of water, it has exercised this power sparingly.” (Gray,

The Modern Era in California Water Law (1994) 45 Hastings L.Rev. 249, 272.)

California has, instead, adopted a policy of voluntary water transfers. (Id. at pp. 273-278.)

Thus, water-rights holders may transfer surplus or conserved water. (Wat. Code, §§ 382,

1001.)

“In the 1980’s, the [State Water Resources Control] Board found some of

Imperial’s water use practices unreasonable and wasteful. The Board directed Imperial to

increase water conservation. One suggested measure by which Imperial could increase

conservation was to transfer conserved water to a willing purchaser in exchange for

funding to support Imperial’s conservation efforts.” (County of Imperial v. Superior

Court, supra, 152 Cal.App.4th at p. 20.) The initial purchaser of Imperial’s conserved

water was Metropolitan. In 1988, Metropolitan agreed to pay for various projects to

conserve water in exchange for which Imperial transferred the conserved water to

Metropolitan. In 1998, a decade later, Imperial and the Water Authority entered a similar

agreement.

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

9

water conveyance facility by someone other than the owner or operator to transport

water.” (Imperial Irrigation, supra, 80 Cal.App.4th at p. 1407.) California law mandates

that the owner or operator of a water conveyance facility allow others to use up to 70

percent of the facility’s unused capacity to transport water upon payment of “fair

compensation.” (Wat. Code, §§ 1810, 1814; QSA Cases, supra, 201 Cal.App.4th at

pp. 840-841.)

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 water from different sources is intermingled as it

moves through an array of reservoirs, aqueducts, and pipelines to reach multiple

agencies. Metropolitan cannot deliver “the same molecules” of Colorado River water the

Water Authority acquires from Imperial because that water is commingled with “other

water Metropolitan has taken off the Colorado River” at Lake Havasu for sale to other

member agencies.4

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



4

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).)

10

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 month. Recipients

under a wheeling agreement receive less than the transfer amount due to evaporation and

other transit losses, but the conveyance system operator bears transit losses under an

exchange agreement. As the trial testimony in the present case established, the parties

here preferred an exchange agreement to a wheeling agreement. The Water Authority

wanted guaranteed delivery and Metropolitan wanted the greater operational flexibility of

an exchange agreement that permits the use of available facilities and supply sources.

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, 201 Cal.App.4th at p. 788.) Negotiations ensued to settle competing claims

to Colorado River water, resulting in a number of related agreements, including a 2003

“quantification settlement agreement.” (Id. at pp. 773, 789.) In those agreements,

Metropolitan, the Water Authority, Imperial and other water agencies settled several

disputes over the priority, use and transfer of Colorado River water. (Id. at p. 789.)

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 agencies.” The Water Authority promised

not to challenge conveyance charges set by Metropolitan for five years following

11

execution of the 2003 exchange agreement but reserved the right thereafter to contest the

rates as contrary to “applicable law and regulation.”

5

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.)6

For years Metropolitan

utilized a single water service rate. In 1998, Metropolitan began a lengthy process to

replace the single rate with a new rate structure allocating charges to separate cost

components, including water supply and transportation. In adopting the new rate

structure, effective 2003, Metropolitan represented that it was designed to create “a cost

of service approach consistent with industry guidelines,” “[e]nsure that users, including

member agencies and other entities, pay the same rates and charges for like classes of

services and provide fair allocation of costs through rates and charges,” and “[o]ffer

choices for services to member agencies and accommodate the development of a water

transfer market.”



5

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.”

6 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.

12

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.”

H. Metropolitan’s Component Rates

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

13

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.7

The rates for fullservice

and wheeling are comprised of different combinations of the component rates set

out above. The full-service rate includes the supply rate, system access rate, system

power rate, and water stewardship rate. The wheeling rate includes the system access rate

and water stewardship rate. (Admin. Code, § 4405.) A recipient of wheeling service does

not pay the system power rate but pays only the actual cost of the power used to transport

the water it receives from a third party.

Under the exchange agreement as amended in 2003, the Water Authority agreed to

pay charges “generally applicable to the conveyance of water by Metropolitan on behalf

of its member agencies” which, the parties agree, are the system access rate, water

stewardship rate and, unlike the situation under a standard wheeling agreement, the

system power rate.

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



7 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.)

14

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 2013-2014 rates.8

The Water

Authority also sought damages for breach of the provision in the amended water

exchange agreement providing that “the price shall be equal to the charge or charges set



8

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.

15

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.” The Water Authority maintained that Metropolitan’s rates are not lawful

conveyance rates and, thus, not properly charged under the amended agreement. The

Water Authority also challenged Metropolitan’s method for calculating the extent of its

right to Metropolitan supplied water in the event of a water shortage. By statute, the

Water Authority has a “preferential right” to Metropolitan water based on its “total

payments” to Metropolitan “excepting purchase of water.” (Wat. Code Appen., § 109-

135.) The Water Authority maintains that, contrary to the position taken by Metropolitan,

its payments under the exchange agreement must be included in the calculation of its

“preferential rights.”

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

wheelers, because at least a significant portion of these costs are attributable to supply,

not transportation. These rates—the System Access Rate, System Power Rate, Water

Stewardship Rate, and Met[ropolitan]’s wheeling rate—therefore violate Proposition 26

16

(2013-14 rates only), the wheeling statutes [(Wat. Code, § 1810 et seq.)], Gov. Code,

§ 549997(a), and the common law. The court invalidates each rate for both the 2011-2012

and 2013-2014 rate cycles.”

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 Metropolitan’s formula for calculating preferential

rights must give the Water Authority credit for amounts paid under the exchange

agreement, reasoning that these payments are not for the “purchase of water,” which are

excluded from that calculation. The court awarded the Water Authority “damages in the

amount of $188,295,602 on the breach of contract claims, plus prejudgment interest in

the amount of $46,637,180 for a total judgment of $234,932,782.”9

The court also

awarded attorney fees of almost $9 million.10



9 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.

10 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.

17

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 revenue. The lawsuits, Metropolitan argues, are barred

under statutes requiring that an action to determine the validity of a local agency’s bonds

be brought within 60 days of bond issuance (Code of Civ. Proc., §§ 860, 863; Gov. Code,

§ 53511) and by annual legislation validating prior bond issuances. Validation statutes

are designed “to settle promptly all questions about the validity” of a public agency’s

actions. (McLeod v. Vista United School Dist. (2008) 158 Cal.App.4th 1156, 1166.) The

Water Authority responds that its lawsuits challenge Metropolitan’s current rates, not its

bond issuance of years ago.11

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.”



11 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.

18

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

2010 and 2012 lawsuits are untimely because they challenge the water rate structure

adopted in 2002. The argument is untenable. Metropolitan first adopted its water rate

structure in 2002 but it has readopted that structure in subsequent years when setting rates

founded on it. Metropolitan’s reenactment and extension of that rate structure to

subsequent years, not its initial adoption, is the action being contested.

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) 37 Cal.4th 685, 702-703.) Were “all

subsequent reenactments . . . immune to judicial challenge or review,” “there would be no

effective enforcement mechanism to ensure that local agencies” base rates on the cost of

service. (Id. at p. 703.) “[I]immunity from judicial review” would create “an incentive for

local agencies to overvalue the estimated costs of services and then continually readopt

that fee.” (Ibid.)

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) 139 Cal.App.3d 83, 88.) In Aughenbaugh, landowners sought a refund of water

charges used to repay bonds financing the water system’s construction. (Id. at p. 87.) The

court found the charges to be part of the bond contract and validated with the bonds. (Id.

at pp. 88-91.) In that case, “ordinances and resolutions which are part of the bond

contract provide[d] that the standby charges in their entirety shall be pledged for the

payment of the cost of the bonds.” (Id. at p. 89.)

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

19

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

of those rates, not the validity of the earlier bond issuance.

B. Wheeling statutes

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, 80 Cal.App.4th at p. 1409.)

20

With limited exceptions, a public agency with unused capacity in its water conveyance

facility may not deny a water transferor the use of the conveyance facility “if fair

compensation is paid for that use.” (Wat. Code, § 1810.) “Fair compensation” is

statutorily defined as “the reasonable charges incurred by the owner of the conveyance

system, including capital, operation, maintenance, and replacement costs, increased costs

from any necessitated purchase of supplemental power, and including reasonable credit

for any offsetting benefits for the use of the conveyance system.” (Wat. Code, § 1811,

subd. (c).)

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, 80

Cal.App.4th at p. 1431.) When initially introduced, the wheeling legislation provided for

the conveyance system owner and wheeler to reach a mutual agreement as to price and, if

unable to reach agreement, for a state agency to set the price. (Id. at p. 1411.) The

Legislature rejected that approach in favor of empowering the conveyance owner to

determine fair compensation subject to judicial review. (Id. at pp. 1412-1413.)

It is not the court’s function to set water rates, but only to determine if substantial

evidence supports the fair compensation determination made by the water agency. (Wat.

Code, § 1813) Where, as here, a trial court’s review is limited to examining the

administrative record to determine if an agency’s decision is supported by substantial

21

evidence, “the appellate court’s function is identical to that of the superior court: It will

review the administrative record to determine whether the agency findings were

supported by substantial evidence, rather than limiting review to the trial court findings.”

(Eisenberg, Cal. Practice Guide: Civil Appeals and Writs (The Rutter Group 2016)

¶ 8:128.2, p. 8-91; see Cal. Assn. of Medical Products Suppliers v. Maxwell-Jolly (2011)

199 Cal.App.4th 286, 303 [“ ‘[W]hen administrative agency action is judicially

reviewable under a substantial evidence standard, the rule for the reviewing trial court

and appellate court is the same.’ ”]; see also Lewin v. St. Joseph Hospital (1978) 82

Cal.App.3d 368, 386 [“If the proper scope of review in the trial court was whether the

administrative decision was supported by substantial evidence, the function of the

appellate court on appeal is the same as that of the trial court, that is, it reviews the

administrative decision to determine whether it is supported by substantial evidence.”].)

Nor are we bound by the trial court’s interpretation of the wheeling statutes, which

presents a question of law. (Imperial Irrigation, supra, 80 Cal.App.4th at p. 1423.)

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

22

in the calculation of wheeling rates.12 (Imperial Irrigation, supra, 80 Cal.App.4th 1403.)

It is not necessary to limit wheeling charges to the marginal cost of transporting water

over the portion of the system utilized in a particular transaction. The trial court

nonetheless found that all of Metropolitan’s payments to the State Water Project,

including those specifically designated for transportation costs, are for the purpose of

obtaining a water supply, so that no part of those payments may be included in

Metropolitan’s wheeling rate. The court “found no reasonable basis” for Metropolitan’s

contention that the State Water Project “conveyance facilities are a part of

[Metropolitan’s] conveyance facilities.”

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 project transportation facilities necessary to

deliver water to the contractor which constitute operation, maintenance, power, and

replacement costs incurred irrespective of the amount of project water delivered to the

contractor.” (Italics added.) Although the state is the owner of the State Water Project and

its facilities, Metropolitan is bound to pay its pro rata share of the capital, operation and

maintenance costs of the conveyance system. In 2011, this share was over $195 million

according to the Water Authority’s calculations and constituted approximately 58 percent

of the State Water Project’s transportation costs. The California Aqueduct unquestionably



12 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) 7 Cal.App.5th 1041, 1052-1053.) Reasonable

system-wide costs are recoverable. The court found that “a conveyance owner may [not]

compel a nonmember agency to pay a wheeling rate calculated on the basis of a strict

proportionate share of capital, overhead, maintenance, and other fixed or ongoing costs.”

(Id. at p. 1055.) The wheeling rate at issue here is not calculated on such a basis and is

imposed only on member agencies.

23

is an integral part of the system by which Metropolitan transports water to its member

agencies.

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 be included in the rate charged to the

Water Authority for wheeling that water over those facilities. Indeed, a consequence of

the trial court’s ruling would be that a wheeler, regardless of which aqueduct is used,

would pay for Metropolitan’s costs incurred in maintaining the Colorado River Aqueduct

but not the California Aqueduct.

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) 59 Cal.2d 159, 201-202.) Metropolitan has no ownership

interest in State Water Project facilities, but the State Water Project contract does more

than furnish water to Metropolitan. The contract entitles Metropolitan to use project

facilities for conveyance and obligates it and other project contractors, not the state, to

pay all costs for building, operating, and maintaining the project’s water conveyance

structures. (See Goodman v. County of Riverside (1983) 140 Cal.App.3d 900, 910 [all

project costs are met by payments from agencies with water contracts].) As these costs

24

are incurred by Metropolitan, so too must they be recovered by it. (Wat. Code, § 1811,

subd. (c).)

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 consultant, Brown and Caldwell. The study is of little relevance as it

predates the rates at issue here by more than 40 years and employed a limited set of cost

categories distinct from those used today. Brown & Caldwell used only four functional

cost categories in its 1969 report: “supply system,” “distribution system,” “water

treatment facilities,” and “administrative and general costs.” “Supply system” costs

included “facilities whose function is the delivery of water from the sources of supply to

the [Metropolitan] distribution system,” including the Colorado River Aqueduct and the

State Water Project (excluding its terminal reservoirs). The “distribution system” picked

up where the “supply system” left off, moving water from Metropolitan’s major conduits

to the localized member agencies. In the 1969 study, Metropolitan’s costs for both the

State Water Project and the Colorado River Aqueduct, representing most of the agency’s

expenses, were placed in an undifferentiated “supply” category.

Water rate authorities advised more refined cost categories. In 1993, a water rates

analyst published a treatise recommending a greater array of functional cost categories

dividing supply from conveyance and transmission costs. (Raftelis, Comprehensive

Guide to Water and Wastewater Finance and Pricing (2nd ed. 1993) p. 168.) In October

1995, Resource Management International, Inc. (RMI) prepared a rate study for

Metropolitan recommending that operating expenses be functionalized into a number of

categories that separate supply (cost of purchasing water and maintaining dams) from

transmission (cost of “operating and maintaining the aqueducts to move water from

sources of supply to major centers of demand”). In May 1996, RMI characterized the

25

State Water Project transportation payment as a transmission cost. RMI found state

charges for capital, operation and maintenance charges for project facilities to be “clearly

transmission-related” and properly allocated to Metropolitan’s transmission or

transportation costs.13

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 charges for the use of the entire conveyance

‘system.’ ”

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



13 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.

26

were divided between supply, conveyance and power “to allow a more detailed level of

analysis to be performed during the evaluation of rate design alternatives.” The State

Water Project Delta water charge and the cost of storage and transfer programs were

delegated to supply and the capital, operations, maintenance and overhead costs for

project facilities that convey water to Metropolitan’s service area were delegated to

conveyance. Power costs to convey water was separately stated.14 Rates were based on

these functional categories, with the system access rate recovering the system-wide cost

of providing conveyance and distribution. The report states that the system access rate

provides “a non-discriminatory rate to all parties that wish to use available system

capacity to move water anywhere in the [Metropolitan] service area” creating “the

opportunity for a fair and efficient water transfer market to develop.” Member agencies

purchasing water from Metropolitan or a third party “will pay the exact same cost for

access to the system.”

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.”15

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



14 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.

15 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.

27

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.

2. Inclusion of the water stewardship rate

As indicated above, Metropolitan’s wheeling rate also includes a water

stewardship rate component designed to fund water conservation programs. (Admin.

Code, § 4124.) As part of its legislative mandate to “expand water conservation, water

recycling, and groundwater recovery efforts” (Wat. Code Appen., § 109‐130.5,

subd. (2)), Metropolitan enters into contracts with its member agencies that are designed

to develop and conserve local water resources. It funds these programs through the water

stewardship rate.

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.

28

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. Funding

conservation programs may lessen capital expenditures for system expansion in the

future, as Metropolitan asserts, but that potential savings is not recoverable under the

terms of the statute that permits recovery for actual conveyance costs—not avoided costs.

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.

29

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 basis.”

(County of Inyo v. Public Utilities Com. (1980) 26 Cal.3d 154, 159, fn. 4.) In evaluating

validity, “[s]ubstantial deference must be given to [Metropolitan’s] determination of its

rate design. [Citation.] ‘Rates established by the lawful rate-fixing body are presumed

reasonable, fair and lawful.’ ” (San Diego County Water Authority v. Metropolitan Water

Dist. (2004) 117 Cal.App.4th 13, 23, fn. 4.)

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 alone minimizes the operational

30

constraints placed on a regional water agency that transports water from multiple sources

to multiple agencies.

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.16 Having made that determination, we need not evaluate the validity of that

rate under the other provisions on which the trial court relied.

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).

17

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 the definition

of a tax is “[a] charge imposed for a specific government service or product provided

directly to the payor that is not provided to those not charged, and which does not exceed

the reasonable costs to the local government of providing the service or product.”18 (Id., §

1, subd. (e)(2).) Metropolitan argues that Proposition 26 is inapplicable because its water

rates are not “imposed” but adopted by a voluntary cooperative of water agencies.

Whether or not “imposed,” the system access and system power rates are not tax levies



16 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.

17 The trial court’s Proposition 26 finding concerned rates only for 2013 and 2014.

18 The Water Authority says Metropolitan failed to raise below the payor-specific

services exception. In fact, the issue was fully briefed.

31

subject to voter approval but are service charges that do not exceed the reasonable costs

to Metropolitan of providing water conveyance.

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 review the trial court’s resolution of factual conflicts for

substantial evidence.” (Newhall County Water Dist. v. Castaic Lake Water Agency (2016)

243 Cal.App.4th 1430, 1440 (Newhall).)19

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.) “Because the rates are based on total water demand, the more

groundwater a retailer uses, the more it pays under the challenged rates. The use of

groundwater demand in the rate structure necessarily means that, in effect, the

[wholesaler] is charging for groundwater use.” (Id. at p. 1446.) The court concluded that

the wholesale water agency “cannot, consistent with Proposition 26, base its wholesale



19 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.

32

water rates on the retailers’ use of groundwater, because the [wholesaler] does not supply

groundwater.” (Id. at p. 1441.) “[T]he demand for a product the Agency does not supply

—groundwater—cannot form the basis for a reasonable cost allocation method: one that

is constitutionally required to be proportional to the benefits the rate payor receives from

(or the burden it places on) the [wholesale] Agency’s activity.” (Id. at p. 1442.)

Here, Metropolitan charges for a service it supplies—water conveyance—and that

charge is founded on the costs borne by Metropolitan in maintaining the conveyance

system. The volumetric system access and system power rates paid by the Water

Authority bear a fair and reasonable relationship to the benefits it receives from its use of

the conveyance system and the burden its use places on that system.

E. Government Code section 54999.7

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

33

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 statutory rate of interest was

wrongly used in the original proceedings because the exchange agreement stipulates a

contractual rate. This contention is unsupported by the terms of the exchange agreement,

as the trial court rightly held.

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 obtain

available water supplies in the event of a shortage. (Wat. Code Appen., § 109-135.) The

statute grants member agencies “a preferential right” to Metropolitan-supplied water

proportionate to the member’s past payments toward Metropolitan’s capital and operating

34

costs, excluding payments for the “purchase of water.”

20 (Ibid.) The trial court found “the

Exchange Agreement was not an agreement pursuant to which [the Water Authority]

obtained water from [Metropolitan], but instead an agreement pursuant to which

[Metropolitan] in effect conveyed water on behalf of [the Water Authority].” Thus, the

Water Authority’s “payments under the exchange agreement must be included in the

preferential rights calculation.” We agree with this conclusion.

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, 117 Cal.App.4th at p. 23.) In prior litigation between

the parties, this district court of appeal upheld Metropolitan’s interpretation of the

preferential rights statute to mean that amounts paid for water purchases are not to be

taken into account in determining preferential rights even when those amounts are

calculated to include the recovery of capital and operating costs. (Id. at pp. 24-25.) The

court held that “where the operating expenses and capital costs of Metropolitan are

included in the rate charged for the water” a member is not “entitled to receive

preferential rights credits for that amount of the water charges attributable” to those costs

and expenses. (Id. at p. 25.)

Metropolitan excludes from its calculation of preferential rights all volumetric

payments for the purchase of Metropolitan water, including the supply rate and

transportation rate components. The Water Authority does not challenge that



20 “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.)

35

methodology here. The only question presented on this appeal is whether the Water

Authority’s payments under the exchange agreement are for the purchase of Metropolitan

water and thus properly excluded from the calculation of preferential rights.

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) 19 Cal.4th 1, 7.) We review the interpretation of a written contract

de novo unless the interpretation turns upon the credibility of extrinsic evidence.

(Coopers & Lybrand v. Superior Court (1989) 212 Cal.App.3d 524, 529.)

The exchange agreement cannot fairly be construed to constitute a purchase of

water from Metropolitan within the meaning of the preferential rights statute. The

purpose, structure and terms of the contract make it clear that the Water Authority is not

purchasing water from Metropolitan but from Imperial. As the trial court rightly

discerned, the Water Authority is exchanging water with Metropolitan “to make use of its

own independent supplies.”

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.

36

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 efforts.” (Wat. Code Appen.,

§ 109‐130.5.) To implement these programs, Metropolitan “enters into project contracts,

on a discretionary basis, with its member agencies” that “require the contracting parties to

develop and implement local resource development, conservation and/or desalination

projects.” Under the local resource development and seawater desalination projects,

Metropolitan “pays up to $250 for each acre-foot of water produced” and, under the

conservation credits program, Metropolitan “pays a specific amount for each acre-foot of

water estimated to be conserved.” Metropolitan “anticipates spending hundreds of

millions of dollars” on these programs.

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.

37

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 contemplated by the RSI clause. After an unsuccessful

mediation, there were only four ongoing project contracts subject to termination, as the

other two had been fully performed according to their terms. On June 14, 2011,

Metropolitan’s board voted to terminate two of the remaining four project contracts that

contained the RSI provision. The other two contracts were amended to provide payments

directly to residents and businesses in the Water Authority’s service region. After

terminating the agreements, Metropolitan “deferred” all “pending incentive agreements”

and declared that future agreements “will not be executed” without further board action.

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 receive program funding

and is unlawful under Civil Code section 1668 by seeking to exempt Metropolitan from

“liability for setting rates in violation of California law.” In pretrial proceedings,

Metropolitan and the Water Authority each moved for summary adjudication of the

declaratory relief cause of action. The trial court adjudicated the claim in Metropolitan’s

favor. The court found the RSI clause satisfies all elements of an unconstitutional

condition but that the Water Authority lacks standing to assert the claim. The court found

that the Water Authority, a public agency, “does not have an independent constitutional

right to petition the legislature or the courts to challenge Metropolitan’s water rates

because that is an inherently individual right.” The court also found Civil Code section

1668 inapplicable because Metropolitan did not seek to contract away all liability but

imposed only a financial disincentive to legal challenges. Following trial, the court

entered judgment on this cause of action in favor of Metropolitan. Our review on appeal

is de novo. (Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 334; Davis v. Kiewit

Pacific Co. (2013) 220 Cal.App.4th 358, 363.)

38

Metropolitan’s stated purpose for the RSI clause is “to ensure funding for its longterm

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.21 The Water Authority contends that the clause purports “to

allow Metropolitan, a government entity, to deprive the Water Authority of its

constitutional right to petition the courts of this state for redress of legitimate legal

grievances against Metropolitan, by allowing Metropolitan the right to unilaterally

terminate the project contracts in the event that the Water Authority challenges

Metropolitan’s rates in court.” The Water Authority argues the RSI clause imposes an

“unconstitutional condition” on water conservation program funding.

The doctrine of unconstitutional conditions limits the government’s power to

require one to surrender a constitutional right in exchange for a discretionary benefit.

(Dolan v. City of Tigard (1994) 512 U.S. 374, 385.) When receipt of a public benefit is

conditioned upon the waiver of a constitutional right, the “ ‘government bears a heavy

burden of demonstrating the practical necessity for the limitation.’ ” (Robbins v. Superior

Court (1985) 38 Cal.3d 199, 213.) “[H]owever well-informed and voluntary that waiver,

the governmental entity seeking to impose those conditions must establish: (1) that the

conditions reasonably relate to the purposes sought by the legislation which confers the

benefit; (2) that the value accruing to the public from imposition of those conditions

manifestly outweighs any resulting impairment of constitutional rights; and (3) that there



21 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.”

39

are available no alternative means less subversive of constitutional right, narrowly drawn

so as to correlate more closely with the purposes contemplated by conferring the benefit.”

(Parrish v. Civil Service Com. (1967) 66 Cal.2d 260, 271 (Parrish).)

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.) In Dolan, the United

States Supreme Court protected the Fifth Amendment right to just compensation in

holding a city could not condition approval of a building permit on the landowner’s

dedication of a portion of the owner’s property for public use. (Dolan v. City of Tigard,

supra, 512 U.S. at p. 385.) The doctrine “vindicates the Constitution’s enumerated rights

by preventing the government from coercing people into giving them up.” (Koontz v. St.

Johns River Water Mgmt. Dist. (2013) __ U.S. __, __ [133 S.Ct. 2586, 2594].)

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,

38 Cal.3d at p. 213 [using public benefit and government benefit interchangeably].) The

doctrine has been applied to benefits given to a discrete group or organization (Evans v.

City of Berkeley (2006) 38 Cal.4th 1, 5-6) and local agencies (Sonoma County Org. of

Public Employees v. County of Sonoma (1979) 23 Cal.3d 296, 318-319).

Also unavailing is Metropolitan’s argument that the Water Authority waived its

right of petition by entering into water conservation contracts containing an RSI clause

surrendering that right. In fact, a Water Authority executive testified that the agency

entered the contracts under a reservation of rights, believing the RSI clause to be

“unlawful and unenforceable.” The argument also fundamentally misconstrues the

40

unconstitutional conditions doctrine. Under the doctrine, a waiver of constitutional rights,

“however well-informed and voluntary that waiver,” is invalid when wrongly conditioned

upon receipt of a public benefit. (Parrish, supra, 66 Cal.2d at p. 271.)

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, 66 Cal.2d

at p. 271.) As the trial court rightly concluded, the evidence shows Metropolitan can

obtain sufficient funding for its water conservation programs without barring member

agencies from water rate challenges. Metropolitan asserts that “factual issues remain” as

to whether the RSI clause is narrowly tailored to achieve rate stability, but Metropolitan

has tendered no evidence tending to show the absence of feasible alternatives. To the

contrary, Metropolitan itself has advised its bondholders, “To the extent that a court

invalidates Metropolitan’s adopted rates and charges, Metropolitan will be obligated to

adopt rates and charges that comply with any mandates imposed by the court.

Metropolitan expects that such rates and charges would still recover Metropolitan’s cost

of service. As such, revenues would not be affected.” If Metropolitan’s rates are revised

in the manner proposed by the Water Authority in the complaint, other member agencies

may pay higher rates unless other actions are taken by the board. “[A]ny impairment of

the right to petition, including any penalty exacted after the fact, must be narrowly

drawn.” (Wolfgram v. Wells Fargo Bank (1997) 53 Cal.App.4th 43, 57.) Our review of

the record finds no evidence sufficient to raise a triable issue of fact on the issue.

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

41

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) 97 Cal.App.4th 814, 821.) The trial

court, noting that the provision recognizes the right of the people to petition government,

held the right applies only to individuals, not to public agencies. The court found no

“direct state law on the issue whether governmental actors have a [constitutional] right to

petition” and observed that the California Supreme Court has not yet decided the issue.

(See Vargas v. City of Salinas (2009) 46 Cal.4th 1, 16-17 [declining to decide the

issue].)22 However, several appellate courts, applying the statute authorizing special

motions to strike strategic lawsuits against public participation (SLAPP) (Code Civ.

Proc., § 425.16), have held that government entities do have First Amendment rights,

including the right to petition. (E.g., Santa Barbara County Coalition Against Automobile

Subsidies v. Santa Barbara County Assn. of Governments (2008) 167 Cal.App.4th 1229,

1237; Bradbury v. Superior Court (1996) 49 Cal.App.4th 1108, 1117.)

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.) That argument is wrongly “premised on the

theory that a government entity and its representatives have no First Amendment rights.”

(Ibid.) The court held that the request of a county and its representative for investigation

by law enforcement agencies was “in furtherance of the right to petition government for

grievances.” (Id. at p. 1117.) Santa Barbara Coalition concerned a local transit agency;

that case likewise held that “government agencies and their representatives have First

Amendment rights, and are ‘persons’ entitled to protection under [Code Civil Procedure]

section 425.16, subdivision (b).” (Santa Barbara County Coalition Against Automobile

Subsidies v. Santa Barbara County Assn. of Governments, supra, 167 Cal.App.4th at

p. 1237.)



22 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) 539 U.S. 194, 210-211.)

42

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), the high court expressed no disapproval of these

decisions. As the Water Authority rightly observes, the anti-SLAPP statute protects acts

in furtherance of the constitutional right of petition, indicating that government agencies’

petitioning rights must ultimately be grounded in the Constitution. Although federal

courts are divided on the issue, the Ninth Circuit, as well as the Second, Third, and

Seventh Circuits, have recognized in the context of Noerr-Pennington23and other issues

that government agencies are protected by the First Amendment right to petition.

(Manistee Town Center v. City of Glendale (9th Cir. 2000) 227 F.3d 1090, 1093; see

Mosdos Chofetz Chaim, Inc. v. Village of Wesley Hills (S.D.N.Y. 2010) 701 F.Supp.2d

568, 598-602.)

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)

42 Cal.3d 1, 5-10 (Star-Kist). That case upheld the standing of local and county

governments to challenge a state law exempting from ad valorem taxation business

inventories of foreign origin or destination shipped through the state. “Standing” in the

context of that case referred “not to traditional notions of a plaintiff’s entitlement to seek

judicial resolution of a dispute, but to a narrower, more specific inquiry focused upon the

internal political organization of the state: whether counties and municipalities may

invoke the federal Constitution to challenge a state law which they are otherwise dutybound

to enforce.” (Id. at pp. 5-6, fn. omitted.) In upholding the right of the local

government agencies to challenge a state law as interfering with Congress’ exclusive



23 See Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc. (1961) 365

U.S. 127, 136 (“[T]he Sherman Act does not prohibit two or more persons from

associating together in an attempt to persuade the legislature or the executive [or a court]

to take particular action with respect to a law that would produce a restraint or a

monopoly.”); United Mine Workers v. Pennington (1965) 381 U.S. 657, 670 (“Joint

efforts to influence public officials do not violate the antitrust laws even though intended

to eliminate competition.”).

43

control over commerce, the court distinguished the “structural” rights at issue in that case

and in cases arising under the Constitution’s supremacy clause from individual rights that

governmental entities have no right to enforce against the state. (Id. at p. 8.)24 “Counties

and cities must look to the state Constitution and the Legislature for their creation and

delegated powers. [Citation.] Counties are ‘merely . . . political subdivision[s] of state

government, exercising only the powers of the state, granted by the state, created for the

purpose of advancing “the policy of the state at large . . . .” ’ [Citation.] Though

municipalities may enjoy a greater degree of autonomy with regard to local affairs

[citation], they too are subject to the sovereign’s right to extend, withdraw or modify the

powers delegated.” (Id. at p. 6.) It is this “legislative control over cities and counties” that

animates the rule that “subordinate political entities, as ‘creatures’ of the state, may not

challenge state action as violating the entities’ rights under the due process or equal

protection clauses of the Fourteenth Amendment or under the contract clause of the

federal Constitution. ‘A municipal corporation, created by a state for the better ordering

of government, has no privileges or immunities under the federal constitution which it

may invoke in opposition to the will of its creator.’ ” (Ibid.)

The dictum in Star-Kist on which the trial court relied has no application in the

present case. It has long been recognized that “[a] municipal corporation, created by a

state for the better ordering of government, has no privileges or immunities under the

Federal Constitution which it may invoke in opposition to the will of its creator.”

(Williams v. Baltimore (1933) 289 U.S. 40, 53; see 13 C. Wright, A. Miller, & E. Cooper,

Fed. Practice and Proc. (1975) § 3531, p. 234 [“Political subdivisions of states have been

held to lack constitutional rights against the creating state, a conclusion that is at times

translated into a lack of standing to challenge state policies.”].) But the Water Authority



24 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) 457 F.Supp. 283, 290.)

44

does not seek to invoke privileges “in opposition to the will of its creator” but to a coequal

public agency. It is not asserting any right against the state that has created it. Suits

between public agencies are hardly uncommon. Although there assuredly is a “long line

of cases which hold that a public entity, being a creature of the state, is not a ‘person’

within the meaning of the due process clause, and is not entitled to due process from the

state” (Santa Monica Community College Dist. v. Public Employment Relations Bd.

(1980) 112 Cal.App.3d 684, 690), the Water Authority is not asserting a right to due

process of law, or equal protection of the law, rights that understandably are principally

for the benefit of natural persons. The right to petition the courts for redress of unlawful

acts, in contrast, is not inherently a right applicable only to natural persons. The

California Constitution confers on public agencies a multitude of rights and powers,

many of which undoubtedly would become meaningless if the agencies were powerless

to enforce them. It is no stretch to find inherent in these rights and powers constitutional

recognition of the right to petition the courts for protection of the agencies’ legal rights.

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, 42 Cal.3d at p. 9.)

Similarly here, if the Water Authority—an intermediary in the delivery chain of water to

the ultimate consumer—cannot challenge the rates charged by Metropolitan, any

unlawful rates that Metropolitan may charge undoubtedly would go unchecked. In a case

such as this one, the right to petition, if successfully asserted, will indirectly inure to the

benefit of the natural persons who ultimately purchase the water to which Metropolitan’s

rates apply. Sound public policy thus militates strongly in favor of recognizing the

constitutional basis for the water agency’s statutory right (Gov. Code, § 945) to seek

judicial relief. As the Ninth Circuit has stated in holding that the First Amendment right

to petition protects government actors, “[t]his kind of petitioning may be nearly as vital to

the functioning of a modern representative democracy as petitioning that originates with

private citizens.” (Manistee Town Center v. City of Glendale, supra, 227 F.3d at p. 1093;

45

see also Mariana v. Fisher (3d Cir. 2003) 338 F.3d 189, 200 [“Governmental petitioning

is as crucial to the modern democracy as is that of private citizens.”].)

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,25 or whether the

provision violates broader principles of unconscionability and public policy.

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) 9 Cal.4th 863, 876.) On remand, the trial court must

determine if one of the parties “recovered a greater relief in the action on the contract”

than the other (Civ. Code, § 1717, subd. (b)(1)) or if the results of the litigation are

sufficiently mixed that no party may be said to have prevailed. (Hsu, supra, at pp. 874-

876.) While the prevailing party determination may change, the scope of the contractual

fee provision remains relevant and requires our consideration.



25 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.”

46

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 with applicable law and regulation . . . . In the event

that [the Water Authority] contests a matter pursuant to the foregoing sentence, the

prevailing party shall be entitled to recovery of reasonable costs and attorney fees

incurred in prosecuting or defending against such contest.”

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) 239 Cal.App.4th 1088, 1110.)

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

47

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. Both phases of trial thus concerned a dispute over whether

charges in the exchange agreement were “set in accordance with applicable law and

regulation.” The prevailing party in that contest, as determined by the trial court on

remand, is entitled to an award of contractual attorney fees.

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.

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.