Answer: IN RE: SAN DIEGO COUNTY WATER AUTHORITY

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SUPERIOR COURT OF CALIFORNIA
COUNTY OF SAN FRANCISCO

Document Scanning Lead Sheet
Dec-02-2014 11:44 am

Case Number: CPF-14-514004
Filing Date: Dec-02-2014 11:41
Filed by: TJ MOROHOSHI
Juke Box: 001 Image: 04707979
GENERIC CIVIL FILING (WITH FEE)

IN RE: SAN DIEGO COUNTY WATER AUTHORITY

001004707979

Instructions:
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FILED
SAN FRANCISCO COUNTY

Bingham McCutchen LLP 8
JAMES J. DRAGNA (SBN 91492)
COLIN C. WEST (SBN 184095)
THOMAS S. HIXSON (SBN 193033)
Three Embarcadero Center

San Francisco, California 94111-4067
Telephone: 415.393.2000

Facsimile: 415.393.2286

es

Quinn Emanuel Urquhart & Sullivan LLP
JOHN B. QUINN (SBN 90378)

ERIC J. EMANUEL (SBN 102187)

865 South Figueroa Street, 10th Floor
Los Angeles, CA 90017-2543

Telephone: 213.443.3000

Facsimile: 213.443.3100

MARCIA SCULLY (SBN 80648)
SYDNEY B. BENNION (SBN 106749)
HEATHER C. BEATTY (SBN 161907)
The Metropolitan Water District Of Southern C
700 North Alameda Street

Los Angeles, California 90012-2944
Telephone: 213.217.6000
Facsimile: 213.217.6980

Attorneys for Respondent and Defendant

Metropolitan Water District of Southern California

Vi!

SUPERIGR COURT

DEC -2 2014

alifornia

EXEMPT FROM FILING FEES
[GOVERNMENT CODE § 6103]

SUPERIOR COURT OF THE STATE OF CALIFORNIA

COUNTY OF

SAN DIEGO COUNTY WATER AUTHORITY,

Petitioner and Plaintiff,
Vv.
METROPOLITAN WATER DISTRICT OF

SOUTHERN CALIFORNIA; ALL PERSONS
INTERESTED IN THE VALIDITY OF THE

RATES ADOPTED BY THE METROPOLITAN

WATER DISTRICT OF SOUTHERN
CALIFORNIA ON APRIL 8, 2014 TO BE

EFFECTIVE JANUARY 1, 2015 and JANUARY

1, 2016; and DOES 1-10,
Respondents and Defendants.

LOS ANGELES
CPF-14-514004
No. BC547139

RESPONDENT AND DEFENDANT
METROPOLITAN WATER
DISTRICT OF SOUTHERN
CALIFORNIA’S ANSWER TO
PETITIONER AND PLAINTIFF’S
PETITION FOR WRIT OF
MANDATE AND COMPLAINT FOR
DETERMINATION OF
INVALIDITY, DAMAGES AND
DECLARATORY RELIEF

Dept.:
Judge:
Date Filed:
Trial Date:

17

Hon. Richard Rico
May 30, 2014

Not Yet Set

METROPOLITAN WATER DISTRICT OF SOUTHERN CALIFORNIA’S
ANSWER TO PETITION AND COMPLAINT

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Respondent and Defendant Me politan Water District of Southern California

(“Metropolitan”) answers Petitioner and Plaintiff San Diego County Water Authority’s

(“SDCWA’s”) unverified Petition For Writ of Mandate and Complaint For Determination of

Invalidity, Damages and Declaratory Relief (collectively, the “Complaint”), as follows:
Pursuant to California Code of Civil Procedure § 431.30(d), Metropolitan

generally denies each and every allegation in the Complaint, and further denies that SDCWA is

entitled to any of the relief prayed for in the C
GENERAL ALLEGATIONS IN

plaint.
UPPORT OF GENERAL DENIAL

AND AFFIRM.

A. The Metropolitan Water District Of Southern California

1. Metropolitan is a public agency and is a supplemental supplier of
wholesale water. It operates as a voluntary coaperative of member public agencies, which join
Metropolitan after a majority of the voters within that agency’s service area vote to become a
member agency. Metropolitan is governed by a Board of Directors composed of representatives
from the member agencies. Today, Metropolitan is made up of 26 member agencies.
2. Each member agency has proportional representation on the Board of
Directors, and is entitled to at least one seat on/the Board, plus an additional seat for every full
ithin the member agency’s service area that is

is made up of 37 directors and, although 23 of

e agencies SDCWA, the City of Los Angeles

3% of the total assessed value of the property
taxable for district purposes. Currently, the B
the agencies have no more than two directors,
Department of Water and Power, and the Municipal Water District of Orange County—each
have four. Each director is guaranteed one vote, which may be weighted more heavily
depending on the property valuation in his or her service area. SDCWA controls approximately
18% of the Board’s vote.
3. As relevant to this case, [Metropolitan provides two separate services: (1)
full service water, where Metropolitan delivers Metropolitan water to its customers, and (2)

wheeling service, where Metropolitan transports third-party water. To the degree a member
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METROPOLITAN WATER DISTRICT OF SOUTHERN CALIFORNIA’S
ANSWER TO PETITION AND COMPLAINT

A/76227907.1agency has local resources, develops local resources, implements conservation, or otherwise

2 | reduces demands, that member agency is not required to use Metropolitan water or water
3 || services in the way a consumer would be required to use services from a local retail water
4 | agency; the member agency is free to opt out fully or partially from Metropolitan’s services. As
5 | to wheeling service, Metropolitan voluntarily maintains a pre-established rate for wheeling
6 || service that applies to wheeling to member agencies for one year or less, for the purpose of
7 | facilitating these shorter-term transactions. All other wheeling transactions are negotiated.
8 | Metropolitan also exchanges Metropolitan water for other water, and those transactions are
9 || negotiated.
10 4. To the degree Metropolitan supplies water to the member agencies, it is as
11 || a supplemental supplier of wholesale water. Injorder to provide a supplemental wholesale water
12 | supply, Metropolitan imports water from two principal sources: the State Water Project (“SWP”)
13 | in Northern California, via the California Aqueduct, and the Colorado River, via the Colorado
14 | River Aqueduct. Metropolitan constructed, and operates and maintains, the Colorado River
15 | Aqueduct. The SWP is operated by the California Department of Water Resources (“DWR”).
16 | Metropolitan, along with other state water contfactors, funded the SWP’s construction and are
17 | obligated to continue to fund its operations and/maintenance, regardless of whether Metropolitan
18 | receives a water allocation from the SWP. DWR, and the state of California, are responsible for
19 | none of the SWP’s costs. Metropolitan delivers Colorado River and SWP water to member
20 || agencies through an extensive regional network of canals, pipelines, and appurtenant facilities, as
gi well as supply, treatment, and storage facilities, Because of the integrated nature of its
yp conveyance and distribution systems, Metropolitan supplies most of its full service customers
«i 23 | with a blend of SWP and Colorado River water. On occasion, Metropolitan must supplement its
a water supplies with non-project and non-Colorado River water, which it delivers to its member
has agency customers through the SWP facilities. Metropolitan also uses the SWP facilities to
6 transport third-party water, or “wheel” water, on behalf of its customers. Metropolitan considers
£97 | both the Colorado River Aqueduct and the SWP part of its conveyance system.
28 5. To pay for its activities, Metropolitan maintains water rates and charges.
METROPOLITAN WATER DIST: oF OF SOUTHERN CALIFORNIA’S

ANSWER TO PETI

A/76227907.1

ION AND COMPLAINT-

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Metropolitan’s enabling statute (the “MWD Act”) mandates that Metropolitan set rates that
recover the revenue necessary to pay its expens¢s. Pursuant to the MWD Act, Metropolitan’s
Board of Directors must set rates and charges, through a majority vote of the representatives of
Metropolitan’s member agencies on the Board. /SDCWA’s claims challenge features of
Metropolitan’s rate structure that have been in place for over a decade and a half.
B. The Evolution of Metropolitan's Full Service Water Rate

6. Until 2003, Metropolitan| charged member agencies a single, bundled rate
without any separate components, i.e., supply of transportation components, for full service
water.

7. In 1998, Metropolitan’s Board of Directors began the process of designing

and implementing unbundled water rates and charges in order to more transparently recover its

costs. Throughout this process, the Board, including representatives from SDCWA and the other
member agencies, sought input from numerous| stakeholders including business and community
leaders and the public at large. SDCWA and Metropolitan’s other member agencies were deeply
involved in the three-year process of developing an unbundled rate structure.
8. On October 16, 2001, Metropolitan’s Board of Directors voted to adopt a
revised, unbundled rate structure. On January B, 2002, Metropolitan’s Board initiated adoption
of the first cycle of rates under the new, unbunilled rate structure. Beginning in February 2002,
once the rate development process was underway, Metropolitan held public hearings on the
recommended rates and charges to be implemented under the new rate structure. On March 12,
2002, with the affirmative vote of SDCWA’s representatives on Metropolitan’s Board,
Metropolitan adopted specific rates and chargés to be effective on January 1, 2003, pursuant to
the rate structure adopted in 2001. Metropolitan’s unbundled rate structure and the rates and
charges that comprise it have remained in effe¢t for over a decade.

Cc. The Components of Metropolitan's Full Service Water Rate

18. Metropolitan’s full service water rate includes the overall cost of

providing full service water. This includes Metropolitan’s supply and transportation-related

SWP costs, as well as its supply and transportation-related Colorado River costs, its demand
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METROPOLITAN WATER DISTRICT OF SOUTHERN CALIFORNIA’S
ANSWER TO PETITION AND COMPLAINT

A76227907.1|
1 | management costs, and other costs. The relevant rate components that Metropolitan uses to

recover the cost of providing full service water include the supply rate components (the Tiers 1
and 2 Supply Rates), and the transportation rate|components (the System Access Rate, System
Power Rate, and Water Stewardship Rate). Member agencies also pay a water treatment charge,

if applicable. Approximately 95% of the time that Metropolitan charges the System Access Rate

2

3

4

5

6 | and Water Stewardship Rate transportation rate;components, it does so as part of the sale of full
7 | service water—the other 5% of the time Metropolitan charges these components as part of its

8 | rate for wheeling service, as discussed below. Metropolitan’s Supply Rates and System Power
9 | Rate are charged as part of the rate for full service water 100% of the time. All full service

10 || customers must pay all of the full service water|rate components. Because of the volumetric

11 | nature of the rate components, full service customers pay each rate component in direct

12 | proportion to the amount of water that they pur¢hase.

13 19. The Supply Rate components of Metropolitan’s full service water rate

14 || recover costs to maintain and develop water supplies needed to meet the member agencies’

15 | demands. These costs include capital financing, operating, maintenance, and overhead costs for
16 | storage in Metropolitan’s reservoirs. These costs are generally recovered through the Tier 1

17 || Supply Rate. However, if purchases in a calendar year by a member agency that executed a

18 || purchase order exceed 90% of its base firm dernand (an amount based on the member agency’s
19 | past annual firm demands), that member agency must pay a higher Tier 2 Supply Rate. Ifa

20 || member agency did not execute a purchase order, the member agency must pay the higher Tier 2
Supply Rate for any amount exceeding 60% offits base firm demand.

20. During its Cost of Servi¢e process, Metropolitan determines what storage-
related costs it anticipates incurring and separates out those costs into three functions, one of
which is drought storage that produces additional supplies during times of shortage, including
dry years. This stored supply is equally available to all member agencies should they need to

utilize it. Metropolitan categorizes drought starage as a supply cost, and ultimately allocates

‘27 || drought storage to its Supply Rates which every member agency pays on a volumetric basis.

28 21. | The System Access Rat¢ generates revenues to recover the capital,
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METROPOLITAN WATER DISTRICT OF SOUTHERN CALIFORNIA’S
ANSWER TO PETITION AND COMPLAINT

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operating, maintenance, and overhead costs associated with the transportation facilities (e.g.,

aqueducts and pipelines) necessary to deliver water to meet member agencies’ average annual

demands. Revenues from the System Access Rate recover the costs of paying for “distribution”

facilities (Metropolitan’s facilities within its seryice area) and “conveyance” facilities (costs

associated with the SWP facilities and Colorado,

River Aqueduct). The System Access Rate also

includes regulatory storage costs, which are assgciated with maintaining additional distribution

capacity and help meet peak demands. The Sys

lem Power Rate generates revenues to recover

the costs of power necessary to pump water through the SWP and Colorado River facilities to

Metropolitan, and through Metropolitan’s facili
allocates transportation costs associated with the
Power Rate the same way it allocates such costs|
22.
Rate and System Power Rate because they const
legally allocated through its contract with the C.
“DWR Contract”). The DWR Contract allocate;
to it. Specifically, it allocates to Metropolitan

ties to the member agencies. Metropolitan
SWP to the System Access Rate and the System

associated with the Colorado River Aqueduct.

The SWP transportation costs are properly allocated to the System Access

(itute conveyance costs that Metropolitan is
ifornia Department of Water Resources (the
to Metropolitan the costs of transporting water

e costs of: (1) the transportation facilities—such

as aqueducts—needed to deliver the water to Metropolitan, and maintenance of those facilities,

and (2) the power required to deliver the water ti

» Metropolitan. Metropolitan is obligated to pay

these costs. The contract makes Metropolitan (and the other state water contractors) solely

responsible for these costs; DWR is responsible
the bulk of these SWP transportation costs regan
supply) that it receives. Moreover, Metropolitan

related purpose at all—as discussed above, Meti

for none of them. And Metropolitan must pay
idless of the amount of SWP water (i.e., water
at times uses the SWP facilities for no supply-

‘opolitan also uses the SWP facilities to convey

non-project water to its full service customers when SWP and Colorado River water is too low to
|

satisfy demands.

23.

to the System Access Rate and System Power

SWP Transportation Charges that the SWP con

Metropolitan is able to appropriately allocate its SWP transportation costs

te because Metropolitan is billed separately for

t legally allocates to it and the costs of
5

ANSWER TO PETIT:
A/76227907.1

IN AND COMPLAINT

METROPOLITAN WATER Penton OF SOUTHERN CALIFORNIA’Sobtaining an SWP water supply. Therefore, through DWR’s bills, Metropolitan is able to
disaggregate (1) the costs Metropolitan incurs to purchase SWP water supplies, from (2) the
costs it is obligated to pay for SWP transportation facilities. The System Access Rate and
System Power Rate, which include SWP transportation costs, are allocated to a member agency
based on the volume of water the agency purchases or requests that Metropolitan convey to it.
This manner of allocation bears a fair or reasonable relationship to the member agency’s burdens
on, or benefits received from, the conveyance system.

24. The Water Stewardship Rate recovers the costs of funding demand
management programs (local water resource development programs, water conservation
programs, and seawater desalination programs). These demand management programs
incentivize the development of local water supplies and the conservation of water which reduce
the volume of water that must be imported and conveyed through Metropolitan’s system, and
thus reduce and defer the need for conveyance system capacity expansion and maintenance costs,
and create available capacity that may be used to accommodate requests to wheel water.
Because all member agencies benefit from these system-wide conveyance benefits, including the
reduction or deferral of capital expenditures by Metropolitan which would be funded through
transportation rates applicable to all member agencies, all member agencies pay the Water
Stewardship Rate, even if they receive no funding for a particular demand management program.
SDCWA has received, and continues to receive, demand management program funding. While
SDCWA’s legal challenges to Metropolitan’s water rates triggered a contractual Rate Structure
Integrity clause which terminated several of SDCWA’s demand management programs,
SDCWA remains among the highest recipients of Metropolitan’s demand management program
funding.

25. Because the conservation and local supply programs funded by the Water
Stewardship Rate provide conveyance services and benefits and avoided conveyance costs, and
because there is no Metropolitan water supply created through the programs (only local water
supply is created), the Water Stewardship Rate is properly treated as a conveyance charge. The

conveyance benefits afforded by the conservation and local supply programs include preserved
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METROPOLITAN WATER DISTRICT OF SOUTHERN CALIFORNIA’S
ANSWER TO PETITION AND COMPLAINT

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or increased conveyance capacity and reduced or deferred capital and operational expenditures

on additional new conveyance facilities and maintenance of existing conveyance facilities. A

member agency’s benefit is proportional to the demand it puts on the conveyance system. The

Water Stewardship Rate is allocated to a member agency based on the volume of water that

agency purchases or requests that Metropolitan
member agency bears a fair or reasonable relati

on, the conveyance system.

onvey to it. This manner of allocation to a

ship to the member agency’s use of, or reliance

26. Metropolitan also recovers its standby and emergency storage costs, as

well as the costs of peak usage and seasonal peak storage capacity, through a number of charges,

namely the Readiness-to-Serve Charge and the

Capacity Charge.

27. Metropolitan’s Readiness-to-Serve Charge recovers, inter alia, SWP-

related conveyance costs associated with peak demand (i.e., capital financing costs), as well as

emergency storage and peak-related storage cos

flexibility in meeting peak demands and flow re\

ts (i.e., storage which provides operational

quirements), and costs incurred to stand by and

provide services during times of emergency or gutage of facilities. Each member agency’s

Readiness-to-Serve Charge is based on that age

ncy’s ten-year rolling average of past total

consumption, i.e., all firm deliveries including water transfers and exchanges that use

Metropolitan capacity.

28. The Capacity Charge is intended to pay for the cost of “peaking” capacity

on Metropolitan’s system, while providing an in
Metropolitan’s system to meet peak day deman
based on that agency’s maximum summer day d

September 30 for a three-calendar year period.

centive for local agencies to decrease their use of
ls. Each member agency’s Capacity Charge is
lemand placed on the system between May 1 and

29. To the extent that ee volumetric rates do not capture the

entirety of Metropolitan’s costs associated with
and within any given year, for any reason, the R
the reasonable costs of standby and peaking, res
the benefit of standby and peaking capability. ]

ember agencies’ fluctuating demands between
leadiness-to-Serve and Capacity Charges recover
pectively, or the reasonable costs of conferring

fhe Readiness-to-Serve and Capacity Charges are
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METROPOLITAN WATER DISTRI

A/76227907.1

ICT OF SOUTHERN CALIFORNIA’S

ANSWER TO PETITION AND COMPLAINTallocated among member agencies based on their historical usage of conveyance services. This
manner of allocation to a member agency bears a fair or reasonable relationship to the member
agency’s use of, or reliance on, standby and peaking services and capacity. In addition, to the
extent a member agency purchases more water, it pays more through Metropolitan’s volumetric
rates.
D. Metropolitan’s Rate For Wheeling Service

30.  Metropolitan’s current rate for wheeling service traces back to January
1997, when Metropolitan’s Board of Directors voted to adopt a “wheeling rate,” effective
January 15, 1997, applicable to member agencies that convey non-Metropolitan water through
Metropolitan’s water conveyance system in transactions of one year or less. This wheeling rate
is defined in Metropolitan’s Administrative Code, and was developed through consultation and
cooperation with Metropolitan’s 26 member agencies, including SDCWA. This fixed rate for
wheeling service applies only to a subset of wheeling transactions: wheeling to a member
agency, for up to one year. Other wheeling transactions (i.e., to a third party of any duration, or
to a member agency for more than one year) are negotiated on a case-by-case basis.

31. This wheeling rate included, among other things, both Metropolitan’s
SWP conveyance costs under the DWR Contract (now allocated to the System Access Rate), and
costs to assist in funding water conservation and other water demand management programs
(now allocated to the Water Stewardship Rate). Instead of paying the System Power Rate,
wheelers are responsible for only the actual costs of power for the wheeling transaction. These
cost allocations are inconsistent with the allegations SDCWA now asserts — more than 15 years
later — that all SWP costs, including conveyance and power costs, and water conservation and
demand program costs must supposedly be allocated solely to Metropolitan’s water Supply Rate.
This wheeling rate has been assessed on any member agency engaged in a wheeling transaction
of one year or less since January 15, 1997, until it was modified in 2003 by the unbundled rates.

32. | When Metropolitan first adopted its rate for wheeling service in 1997, it
made written findings, pursuant to the Wheeling Statute, which concluded that allocating SWP

transportation costs, and costs to incentivize local resource development programs, to its general
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METROPOLITAN WATER DISTRICT OF SOUTHERN CALIFORNIA’S

ANSWER TO PETITION AND COMPLAINT
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rate for wheeling service results in a rate that charges fair compensation. These findings are

embodied in Metropolitan’s Resolution 8520.

33. Metropolitan found that it was appropriate to include a portion of its fixed

SWP conveyance charges in its general rate for
responsible for, and benefit from those costs. F
transportation costs pursuant to its contract with,
water through the SWP on behalf of its member!
wheel water on behalf of its member agencies, i
applicable facilities fee because it has already pa
Transportation Charges under the DWR Contra¢
pay its allocated share of the costs of the SWP fé
not, and whether it wheels water for its member’
1997 Resolution that if wheelers did not bear a p
costs, then they would gain an unfair subsidy fro
Because every member agency that wheels wate
basis, each wheeler pays a portion of Metropoli
to the amount of water that Metropolitan wheels

34. Metropolitan also found ¢

heeling service because wheelers are partially
r instance, Metropolitan’s payment of SWP
DWAR, gives Metropolitan the right to wheel
agencies. When Metropolitan uses the SWP to
does so without having to pay an otherwise
id for this service by paying the fixed
t. Under this contract, Metropolitan agreed to
acilities, whether Metropolitan receives water or
agencies or not. Metropolitan recognized in its
portion of Metropolitan’s fixed SWP conveyance
m Metropolitan’s full service customers.
ir pays the System Access Rate on a volumetric
lan’s system-wide SWP costs in direct proportion
to that agency.

hat the costs for water conservation projects and

financial assistance for water recycling and groundwater recovery facilities provided benefits to

the whole system, including wheelers, and shou!

\d therefore be recovered in part through the rate

for wheeling service. This is because all member agencies, including wheelers, benefit from

each acre-foot of water developed through the demand management programs, because they free

up capacity to convey water through Metropolitan’s system, reducing the need to invest in

development of additional expensive water deli

transactions to take place.

ery infrastructure, and allowing more wheeling

35. | Member agencies have options regarding water supply including local

water supply, water purchases and conveyance from non-Metropolitan third-party providers,

purchases from Metropolitan, or purchases from

third-party providers and conveyance using
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METROPOLITAN WATER DISTRI

[CT OF SOUTHERN CALIFORNIA’S

ANSWER TO PETITION AND COMPLAINT

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Metropolitan services and facilities. Metropolitan charges are incurred only if an agency elects
to purchase water from Metropolitan, and/or use Metropolitan’s conveyance services and
facilities to transport non-Metropolitan water. In that sense, the charges are voluntary, not
imposed. In any event, Metropolitan’s transportation charges are for the service of conveyance
and do not exceed the reasonable costs of providing conveyance services, and/or they are for the
use of Metropolitan’s property (i.e., conveyance resources). As part of the full service rate, the
transportation charges are also a charge for the purchase of Metropolitan’s property (water).
Conveyance charges, including Metropolitan’s wheeling charges, are allocated to an agency
based on the volume of water the agency transports through Metropolitan’s conveyance system.
The manner that these charges are allocated to a member agency bears a fair or reasonable
relationship to the member agency’s burdens on, or benefits received from, Metropolitan’s
conveyance system.

E. The Exchange Agreement

36. At times, Metropolitan makes agreements with a party that fall outside the
context of either providing full service water or wheeling water on behalf of a member agency.
As noted above, one such transaction is an exchange of water. In 1998, Metropolitan and
SDCWA signed an Agreement for the Exchange of Water, under which Metropolitan agreed to
sell SDCWA a blend of SWP and Colorado River water (the “Exchange Water”) in exchange for
Colorado River water SDCWA was to receive through a Transfer Agreement with the Imperial
Irrigation District (“IID”).

37. Under the 1998 Exchange Agreement, SDCWA agreed to pay a fixed
volumetric price for water it received from Metropolitan in exchange for the water SDCWA
provided to Metropolitan from the IID transfer for a term of thirty years.

38. In 2003, SDCWA approached Metropolitan asking to renegotiate the 1998
Exchange Agreement, seeking a better deal. Under the renegotiated contract, SDCWA agreed to
pay a higher exchange price: $253 per acre-foot for the first year, and thereafter to pay the
charges “generally applicable to the conveyance of water” (i.e., the transportation components of

Metropolitan’s full service water rate—the System Access Rate, the System Power Rate, and the
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METROPOLITAN WATER DISTRICT OF SOUTHERN CALIFORNIA’S
ANSWER TO PETITION AND COMPLAINT

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Water Stewardship Rate). In exchange for the negotiated price term, SDCWA received

substantial benefits as set forth below, including 77,700 acre-feet per year of All-American

Canal and Coachella Canal lining water for 110

for canal lining and conjunctive use programs.
39.

2003 (the “2003 Exchange Agreement”), Metro,

lyears, and Metropolitan’s right to $235 million

At the time SDCWA signed the amended Exchange Agreement in October

politan’s unbundled rate components, including

the transportation components that served as the basis of the Exchange Price, had been in effect

for nearly ten months. SDCWA was part of the

adoption of the unbundled full service water rat

multi-year process that culminated in the

. SDCWA chose to pay the System Access

Rate, System Power Rate, and Water Stewardship Rate under the 2003 Exchange Agreement in

return for the numerous benefits it received as a of the consideration package, including:

a. State Funding:

tropolitan assigned to SDCWA $235 million in

funding authorized by the California State Legislature that had previously been allocated to

Metropolitan, for lining the All-American and

Poachella Canals and for groundwater programs.

b. Canal Lining Water: MWD assigned to SDCWA its rights to an

estimated 77,000 acre-feet of water per year

for 110 years from the lining of the All-

American and Coachella Canals. The estimated value of this water over 110 years is in the

billions.

c. Assured Deliveries: Metropolitan agreed to deliver Exchange

Water to SDCWA equivalent to the full amount of the IID transfer and canal lining water in

each calendar year that the Exchange Agreemen
contrast, if this were a wheeling transaction, the

requires Metropolitan to deliver water when ani

it is in effect, in regular monthly intervals. In
law (California’s Wheeling Statute) only

if it has available capacity in its pipelines and

facilities to transfer this water. Under the law, whenever Metropolitan does not have available

capacity, the delivery of water would stop altogt
use of its system to move its own water supplies
when there are not outages due to maintenance

obligation to deliver the water to SDCWA. In

ether. For example, if Metropolitan requires the
at all times the facilities are in operation (i.e.,
pr repairs), Metropolitan would have no legal

vontrast, the Exchange Agreement ensures that
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METROPOLITAN WATER DISTRICT OF SOUTHERN CALIFORNIA’S

ANSWER TO PETIT

ION AND COMPLAINT

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SDCWA will receive Exchange Water even if delivering that water would displace

Metropolitan’s water supplies for its other member agencies. Further, under the Exchange

Agreement, Metropolitan is only required to deliver to SDCWA an amount of water equivalent

to the amount conserved by IID. Yet, when IID] fails to conserve the full amount of water

required by the Transfer Agreement between III) and SDCWA, as occurred in 2011,

Metropolitan delivers Metropolitan’s supplies t

SDCWA to fill the gap.

d. Blended Exchange Water: I[D’s transfer water and the canal lining

water consists only of Colorado River water, wl

ich has the highest salinity content of

Metropolitan’s two sources of water supply. Under the Exchange Agreement, Metropolitan

provides Exchange Water to SDCWA from whi

itever supply source and using whatever delivery

facilities as Metropolitan determines. The result generally is blended water, consisting of

California State Water Project water blended in

improves the quality of the water SDCWA rece

to the Colorado River water. This greatly
ives, providing acknowledged water quality and

operational benefits to SDCWA. And, when Metropolitan shuts down the Colorado River

Aqueduct for maintenance or repairs, Metropol

itan still delivers Exchange Water, using SWP

supplies and SWP facilities. These are among many key reasons why the conveyance costs of

the SWP should be recovered through Metropa
Metropolitan’s rate structure and the Exchange
achieving the lower salinity levels possible. B
Metropolitan is only required to deliver to SDC
lining Colorado River water.

e. System Power Ra

litan’s System Access Rate, which is part of both
‘Agreement’s price provision. The SWP makes
law (the California Wheeling Statute),

WA the high-salinity, IID transfer and canal

ite: Metropolitan agreed to include the System

Power Rate (Metropolitan’s average cost of pumping water) in the Exchange Agreement fees

instead of the actual, higher marginal power c

sts. The law (California’s Wheeling Statute)

only requires Metropolitan to charge SDCWA the higher amount.

f. Readiness-to-Serve Charge: By not counting the deliveries of

Exchange Water against SDCWA’s Readiness-to-Serve Charge base — although they require

use of Metropolitan’s distribution system resqurces -SDCWA avoids paying that share of the

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Readiness-to-Serve Charge. This provided an estimated $4.5 million benefit to SDCWA
through 2012.

g- Exchange Water as a Local Supply: Metropolitan agreed to
account for the Exchange Water as a local supply in the context of Metropolitan’s Water
Supply Allocation Plan (“WSAP”). This designation benefits SDCWA through an increase in
retail reliability in the event of a water supply shortage, under the WSAP formula.

h. Ownership of Colorado River Supply: Since the merger of
SDCWA into Metropolitan, SDCWA has not owned any rights to Colorado River water. The
Quantification Settlement Agreement, a historic collection of agreements that includes the 2003
Exchange Agreement, provides Metropolitan’s agreement that SDCWA can implement a transfer
of Colorado River water from IID. Without Metropolitan’s acquiescence, IID does not have the
right to transfer its water to an entity that is not an existing Colorado River water contractor; and
Metropolitan and Coachella Valley Water District, as Colorado River contractors, would have
the right to use Colorado River water that is unused by IID.

F. SDCWA’s Benefits From MWD’s Operations
40. | SDCWA receives numerous additional benefits from MWD’s democratic
and cooperative structure as a whole. The long list of policies, programs, agreements, and
other actions adopted or taken by the Metropolitan Board that have financially or
operationally benefited SDCWA include the following. Many of these were adopted or
approved with provisions that were deferential to specific concerns that SDCWA had raised or,
in some cases, were negotiated to provide a direct financial benefit to SDCWA.

a. “Postage Stamp” Rate: Metropolitan charges its member agencies
the same amount for conveying water, regardless, of how close or how far the member agency is
to the supply source. This has been likened to a “postage stamp” having the same cost whether it
is transporting a letter down the street or across the country. SDCWA is the member agency that
is the farthest away from Metropolitan’s water supply sources (from Northern California and the
Colorado River) and benefits the most from this ‘tone price to all” transportation rate structure.

b. Salinity Goal: Metropolitan’s Board adopted a 500 TDS (total
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dissolved solids) salinity goal in response to SDCWA’s concerns about high salinity in the

Colorado River supplies and the impacts to SDCWA. SDCWA receives the primary benefit of
this measure, and those benefits extend to the Exchange Agreement supplies.

c. Readiness-to-Serve Charge Base: As an accommodation to
SDCWA’s concerns about variability of demands for Metropolitan supplies from year to
year, Metropolitan’s Board adopted a 10-year rolling average of Metropolitan deliveries for
calculating the Readiness-to-Serve Charge base (rather than the previous three-year rolling
average).

d. Interim Agricultural Water Program (“IAWP”) and IAWP Phase
Out: As the largest agricultural water purchaser among Metropolitan’s member agencies,
SDCWA benefited more than any other member agency from discounted interruptible service
for agriculture from 1994 until the first interruption in 2007, receiving $136 million in total
discounts over that period. SDCWA was also the largest beneficiary of the IAWP Phase Out
terms that allowed these historically interruptible demands to be treated as firm, rather than
interruptible, demands. This increases SDCWA’s access to a lower cost water supply rate
(Metropolitan’s Tier 1 rate) and improved its retail reliability in a shortage allocation under
the WSAP formula.

e. Skinner Treatment Plant Module 7: SDCWA supported
construction of a $152 million expansion of this treatment plant, which serves SDCWA along
with agencies in Riverside County. This expansion of the Skinner plant would prove to be
redundant to SDCWA’s new Twin Oaks water treatment facility, leaving Metropolitan with
unused capacity in the Skinner plant.

f. Surface Storage Operating Agreement: This program approved
in 2002, available only to SDCWA, paid financial incentives totaling $17.6 million (2004
through 2008) for SDCWA to use its own reservoirs to help offset system capacity
constraints.

g. Point of Delivery and Cost of San Diego Pipelines 1 to 5:

Metropolitan’s policy is that it delivers water to the boundary of a member agency’s service area
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METROPOLITAN WATER DISTRICT OF SOUTHERN CALIFORNIA’S
ANSWER TO PETITION AND COMPLAINT

A/76227907.1and a member agency must pay for infrastructure within its own service area. Metropolitan

waived its policy for SDCWA. It allowed Metropolitan pipes and facilities serving SDCWA to
be constructed six miles into SDCWA’s service area, and the substantial costs of these pipes and
facilities were borne by all Metropolitan member agencies rather than solely by SDCWA.

h. Conservation Funding: Metropolitan includes a Rate Structure
Integrity provision in all of its conservation and local supply program agreements. When
Metropolitan enforced this contractual provision with respect to SDCWA, it could have
discontinued all of SDCWA’s conservation and local supply program funding. As an
accommodation, Metropolitan’s Board continued access by SDCWA customers to conservation
funding under rebate programs.

i. Supply Allocation Plans: A preferential rights formula exists
under California state law and concerns the allocation of water among Metropolitan member
agencies in the case of a severe drought. Preferential rights have never been invoked. Instead,
Metropolitan’s Board adopted the 1991 Incremental Interruption and Conservation Plan and
then the 2008 WSAP, both of which provided a “needs-based” allocation to most fairly treat all
member agencies, including SDCWA. These alternative measures provided SDCWA with a
more beneficial allocation than the preferential rights statute would have provided, and were
intended to address SDCWA’s concerns regarding statutory preferential rights while providing
equity among member agencies.

SPECIFIC AFFIRMATIVE DEFENSES

Metropolitan asserts the following affirmative defenses to the claims for relief
made against it in the Complaint without admitting it has the burden of proof on any of the issues
raised below:

First Affirmative Defense
(Failure to State Facts Sufficient to Constitute a Cause of Action)
(Applicable to All Causes of Action)
Metropolitan incorporates by reference the General Allegations stated above.

SDCWA fails to state facts in its Complaint sufficient to constitute a cause of
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METROPOLITAN WATER DISTRICT OF SOUTHERN CALIFORNIA’S
ANSWER TO PETITION AND COMPLAINT

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action upon which relief can be granted. Among other grounds, neither Proposition 13, i.e.,

Article XIII A, § 4 of the California ne Anon (adopted by Proposition 13 in 1978), and its

implementing statute, California Government Code § 50076, nor California Government Code

§§ 54999.7(a) and 66013, nor Proposition 26, i.

., Article XIII C, Section 1, subdivision (e)

(adopted by Proposition 26), nor California Water Code §§ 1810 et seq. are applicable to the

facts alleged in the Complaint.

Second Affirmative Defense

(Statute of Limitations)

(Applicable to All Causes of Action)

Metropolitan incorporates by reference the General Allegations stated above.

SDCWA’s claims are barred in whole or in part by the applicable statutes of

limitations, including, but not limited to, §§ 338(a), 335.1, 343 and 860 of the California Code of

Civil Procedure. Further, Metropolitan issued its first of many water revenue bonds

incorporating the new rate structure components on September 12, 2002. The 60-day deadline to

file a reverse validation action thus expired at the latest in November 2002, 60 days after the

bond issuance — and nearly twelve years before

the rate structure components is barred by the st

this case was filed. Therefore, any challenge to

tatute of limitations in the validation statute. Cal.

Code Civ. Pro. § 860; see Aughenbaugh v. Board of Supervisors, 139 Cal. App. 3d 83, 87-91

(1983).

Third Affirmative Defense

(California Government Claims Act)

(Applicable to Al

1 Causes of Action)

Metropolitan incorporates by reference the General Allegations stated above.

SDCWA’s claim for breach of contract, as well as any other causes of action or

relief sought to the extent they may implicate th

e California Government Claims Act, is barred in

whole or in part because SDCWA failed to comply with all provisions of the Government

Claims Act, including but not limited to California Government Code §§ 905, 905.2, 910 et seq.,

935 and 945.4, and the Metropolitan Water District of Southern California Administrative Code

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§§ 9300-9310.

ative Defense

(Applicable to All

Causes of Action)

Metropolitan incorporates by reference the General Allegations stated above.

SDCWA’s breach of contract claim for money damages, as well as any other

causes of action or relief sought to the extent the

requirements in the Government Code, is barred

y may implicate the Claim Presentation

because the money and damages sought in the

Complaint are barred by the Claim Presentation] requirements in the California Government Code

§§ 900 et seq.

Fifth Affirmative Defense

(Untim
(Applicable to
Metropolitan incorporates by re!
SDCWA’s claim for breach of
relief sought to the extent they may implicate

SDCWA failed to timely file a claim as require}

ly Claim)

Causes of Action)

rence the General Allegations stated above.
tract, as well as any other causes of action or
following provisions, is barred because

d by California Government Code §§ 901, 911.2,

911.3, 911.4 and 946.6, and the Metropolitan Water District of Southern California

Administrative Code §§ 9300-9310, and failed
failure to timely present a claim, as required by|
Metropolitan Water District of Southern Califo
the foregoing, SDCWA’s Fourth Cause of Actij
sought to the extent they may implicate the fore

Sixth Affirm

0 timely file a court action relieving it from its
Government Code §§ 945.4 and 946.6, and the
pnia Administrative Code. As a consequence of
pn, as well as any other causes of action or relief
going provisions, is barred as untimely.

ative Defense

(Laches)

(Applicable to All Causes of Action)

Metropolitan incorporates by reference the General Allegations stated above.

SDCWA’s claims are barred by!

the doctrine of laches.
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METROPOLITAN WATER DISTRICT OF SOUTHERN CALIFORNIA’S
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Seventh Affirmative Defense

(Exercise of Administrative Discretion)

(Applicable to All Causes of Action)

Metropolitan incorporates by reference the General Allegations stated above.

Metropolitan has no ministerial duty to structure its rates in the manner alleged by
SDCWA or to enter into contracting arrangements in the manner SDCWA contends. Rather, the
legal directives under which Metropolitan operates broadly leave the design of water rates, as
well as its contracting practices, to Metropolitan’s sound discretion and the majority vote of
Metropolitan’s Board of Directors. Metropolitan’s principal act, for example, states only that
Metropolitan “shall fix the rate or rates at which| water shall be sold,” Cal. Water Code § 109-
133, and that those rates “shall be uniform for like classes of service throughout the district,” id.
at § 109-134. Beyond this, decisions as to the detailed structure of its rates, or the substance of
its contracting practices, are left to Metropolitan’s sound discretion. California courts have
recognized that “[s]ubstantial deference must be given to [Metropolitan’s] determination of its
tate design.” San Diego County Water Auth. v. Metropolitan Water Dist. of So. Cal., 117 Cal.
App. 4th 13, 23 n.4 (2004) (citing Bryon v. East| Bay Mun. Utility Dist.,24 Cal. App. 4th 178,
196 (1994)). Further, “[rJates established by [a] lawful rate-fixing body are presumed
reasonable, fair, and lawful.” Hansen v. City of San Buenaventura, 42 Cal. 3d 1172, 1180
(1986). In setting its current rates and entering into and administering the Exchange Agreement,
Metropolitan has at all times acted well within its broad and lawful discretion.

SDCWA’s claims are barred because Metropolitan has acted consistently with the
discretion vested in it by the Legislature in California Water Code Appendix §§ 109-1 to 109-
551 and other applicable authorities. |

Eighth Affirhative Defense
(Governmental Immunity for Exercise of Discretion)
(Applicable to All Causes of Action)
Metropolitan incorporates by reference the General Allegations stated above.

Metropolitan’s classification and| setting of its rates, allocation of its rate structure
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components, and the other decisions alleged in the Complaint to be unlawful were an exercise of
governmental discretion immune from challenge and, as such, all of SDCWA’s causes of action
are barred. Among other reasons, SDCWA’s claims and the relief it seeks are incompatible with

”s Board of Directors act by majority vote.

the requirement in the MWD Act that Metropolit

(Validation by Operation of Law)
(Applicable to All Causes of Action)
Metropolitan incorporates by reférence the General Allegations stated above.
Metropolitan’s rate structure components and cost allocations that SDCWA
challenges have been in effect since January 1, 3003 and have been validated by operation of
law, including but not limited to California Code of Civil Procedure § 869 and validating acts of
the Legislature, such as The First Validating Act of 2003 (2003 Cal. Stats. Ch. 9, filed May 1,
2003 and effective immediately) and similar validating acts. In particular, the validation of
bonds validates the rate structure components pledged as security for those bonds. Metropolitan
issued its first of many water revenue bonds incorporating the new rate structure components on
September 12, 2002. The rate structure components were validated because no one challenged
them within the 60-day time period following Metropolitan’s 2002 bond issuance. The 60-day
deadline to file a reverse validation action thus éxpired at the latest in November 2002, 60 days
after the bond issuance — and nearly twelve years before this case was filed. Therefore,
Metropolitan’s rate components were validated by operation of law in 2002. The rate structure
components were also validated by operation of law by the first validating act after the bond
issuance, the First Validating Act of 2003, and subsequent validating acts. The current rate

structure components, having been validated by, operation of law, cannot be challenged as long

Tenth ao Defense
(Separation of Powers)

(Applicable to Alll Causes of Action)

as they remain in use.

Metropolitan incorporates by reference the General Allegations stated above.
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METROPOLITAN WATER DISTRICT OF SOUTHERN CALIFORNIA’S
ANSWER TO PETITION AND COMPLAINT

A/76227907.1SDCWA’s claims are barred in whole or in part because they seek improper
judicial interference with Metropolitan’s quasi-legislative agency actions and discretion. Among
other reasons, SDCWA’s claims and the relief it seeks are incompatible with the requirement in
the MWD Act that Metropolitan’s Board of Directors act by majority vote.

Eleventh Affirmative Defense
(Ripeness)
(Applicable to All Causes of Action)

Metropolitan incorporates by reference the General Allegations stated above.

To the extent SDCWA’s claims for relief relating to the Wheeling Statute purport
to extend beyond a facial challenge to Metropolitan’s rate for wheeling service, the claims are
unripe for adjudication because SDCWA does not currently wheel any water through
Metropolitan’s system and/or because SDCWA does not allege that the charge for any particular
wheeling transaction was unlawful.

Twelfth Affirmative Defense
(Waiver)
(Applicable to All Causes of Action)

Metropolitan incorporates by reference the General Allegations stated above.

SDCWA’s claims are barred because SDCWA has waived, relinquished, and/or
abandoned any claim for relief against Metropolitan regarding the matters which are the subject
of the Complaint.

Thirteenth Affirmative Defense
(Res Judicata and Collateral Estoppel)
(Applicable to All Causes of Action)

Metropolitan incorporates by reference the General Allegations stated above.

SDCWA’s claims are barred by the doctrine of res judicata and collateral
estoppel, including, without limitation, the following:

SDCWA’s claims that Metropolitan’s water rates violate Water Code § 1810 et

seq., which requires that wheeling rates not exceed “fair compensation” for the conveyance of
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METROPOLITAN WATER DISTRICT OF SOUTHERN CALIFORNIA’S
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