Answer: IN RE: SAN DIEGO COUNTY WATER AUTHORITY

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                                HAAUEANUUNUGAE

SUPERIOR COURT OF CALIFORNIA
COUNTY OF SAN FRANCISCO

Document Scanning Lead Sheet
Dec-02-2014 12:15 pm

Case Number: CPF-14-514004
Filing Date: Dec-02-2014 12:03
Filed by: TJ MOROHOSHI

Juke Box: 001 Image: 04708047
GENERIC CIVIL FILING (WITH FEE)

IN RE: SAN DIEGO COUNTY WATER AUTHORITY

001004708047

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SAN FRANCISCO COUNTY
SUPERIOR COURT
MICHAEL N. FEUER, City Attorney

RICHARD M. BROWN, General Counsel DEC -2 2014 Superior Gauri of Caltowia
Water and Power us

Tina P. Shim (SBN: 233910) CLE He CQUAT JUL 24 2014

Deputy City Attorney By: GEPUTY

Julie Conboy Riley (SBN: 197404) $s Sherri Carter, Exacutive Orficer/Clerk
Deputy City Attorney Oe oad Qe Deputy
111 N. Hope Street, Room 340 Raul Sanchez

Los Angeles, California 90012

Telephone: (213) ron

Facsimile: (213) 241-143 E FROM FILING FEES
Email: tina.shim@ladwp.com ee tOne. § 6103

Amrit S. Kulkarni (SBN: 202786)

akulkarni@meyersnave.com

Julia L. Bond (SBN: 166587)
jbond@meyersnave.com

MEYERS, NAVE, RIBACK, SILVER & WILSON
555 12" Street, Suite 1500

Oakland, California 94607

Telephone: (510) 808-2000

Facsimile: (510) 444-1108

Attorneys for THE CITY OF LOS ANGELES,
ACTING BY AND THROUGH THE LOS
ANGELES DEPARTMENT OF WATER AND

POWER
SUPERIOR COURT OF THE STATE OF CALIFORNIA
COUNTY OF LOS ANGELES,
CPF*14~514004
SAN DIEGO COUNTY WATER Case No. BC547139
AUTHORITY,
CITY OF LOS ANGELES DEPARTMENT
Petitioner and Plaintiff, OF WATER AND POWER’S ANSWER
TO PETITIONER AND PLAINTIFF’S
v. PETITION FOR WRIT OF MANDATE
AND COMPLAINT FOR

METROPOLITAN WATER DISTRICT OF DETERMINATION OF INVALIDITY,
SOUTHERN CALIFORNIA; ALL PERSONS | DAMAGES AND DECLARATORY
INTERESTED IN THE VALIDITY OF THE RELIEF

RATES ADOPTED BY THE

METROPOLITAN WATER DISTRICT OF Judge: Hon. Richard Rico
SOUTHERN CALIFORNIA ON APRIL 8, Dept.: 17

2014 TO BE EFFECTIVE JANUARY 1, 2015

AND JANUARY 1, 2016; and DOES 1-10, Action Filed: May 30, 2014

Trial Date: None Set
Respondents and Defendants.

City of Los Angeles Department Of Water And Power's Answer To Petition For Writ of Mandate and ComplaintoO OND HW BF WY |

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Pursuant to California Code of Civil Procedure, Section 860, et seq., Real Party In Interest
CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER (“LADWP”) hereby
answers the first three causes of action alleged in 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!:

GENERAL DENIAL

Pursuant to California Code of Civil Procedure § 431.30(d), LADWP 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 Complaint.

GENERAL ALLEGATIONS IN SUPPORT OF GENERAL DENIAL
AND AFFIRMATIVE DEFENSES

A. The Metropolitan Water District Of Southern California

1. Respondent and Defendant the Metropolitan Water District of Southern California
(“Metropolitan” or “MWD7”) is a public agency and is a supplemental supplier of wholesale water.
It operates as a voluntary cooperative 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 3% of the
total assessed value of the property within the member agency’s service area that is taxable for
district purposes. Currently, the Board is made up of 37 directors and, although 23 of the agencies

have no more than two directors, three agencies -SDCWA, LADWP, and the Municipal Water

' LADWP is a Real Party in Interest in the first, second, and third causes of action in SDCWA’s
Complaint. The fourth cause of action in the Complaint is not asserted against LADWP as a Real
Party in Interest, as LADWP is not a party to the Exchange Agreement between SDCWA and the
Metropolitan Water District of Southern California that is at issue in the fourth cause of action.

1

City of Los Angeles Department Of Water And Power’s Answer To Petition For Writ of Mandate and ComplaintDistrict 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 M

¢tropolitan water to its customers, and (2) wheeling

service, where Metropolitan transports third-party water. To the degree a member agency has

local resources, develops local resources, implements conservation, or otherwise reduces demands,

that member agency is not required to use Metropolitan water or water services in the way a

consumer would be required to use services from a local retail water agency; the member agency

is free to opt out fully or partially from Metro

politan’s services. As to wheeling service,

Metropolitan voluntarily maintains a pre-established rate for wheeling service that applies to

wheeling to member agencies for one year or
transactions. All other wheeling transactions

Metropolitan water for other water, and those

less, for the purpose of facilitating these shorter-term
are negotiated. Metropolitan also exchanges

transactions are negotiated.

4. To the degree Metropolitan supplies water to the member agencies, it is as a

supplemental supplier of wholesale water. In
supply, Metropolitan imports water from two

in Northern California, via the California Aq

order to provide a supplemental wholesale water

principal sources: the State Water Project (“SWP”)

educt, and the Colorado River, via the Colorado

River Aqueduct. Metropolitan constructed, and operates and maintains, the Colorado River

Aqueduct. The SWP is operated by the California Department of Water Resources (“DWR”).

Metropolitan, along with other state water contractors, funded the SWP’s construction and are

obligated to continue to fund its operations

receives a water allocation from the SWP. D

maintenance, regardless of whether Metropolitan

WR, and the State of California, are responsible for

none of the SWP’s costs. Metropolitan delivers Colorado River and SWP water to member

agencies through an extensive regional netwo}

rk of canals, pipelines, and appurtenant facilities, as

well as supply, treatment, and storage faciliti¢s. Because of the integrated nature of its

conveyance and distribution systems, Metrop:

a blend of SWP and Colorado River water. O

olitan supplies most of its full service customers with

in occasion, Metropolitan must supplement its water

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City of Los Angeles Department Of Water And Power

's Answer To Petition For Writ of Mandate and Complaint0 Oo ND

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supplies with non-project and non-Colorado River water, which it delivers to its member agency

customers through the SWP facilities. Metropolitan also uses the SWP facilities to transport third-

party water, or “wheel” water, on behalf of its’
Colorado River Aqueduct and the SWP part o:

customers. Metropolitan considers both the
f its conveyance system.

5. To pay for its activities, Metropolitan maintains water rates and charges.

Metropolitan’s enabling statute (the “MWD Avct”) mandates that Metropolitan set rates that

recover the revenue necessary to pay its expenses. 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.
6.

The Evolution of Metropolitdn’s Full Service Water Rate

Until 2003, Metropolitan charged member agencies a single, bundled rate without

any separate components, i.e., supply or 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
involved in the three-year process of develop’

8.

On October 16, 2001, Metrop¢

Metropottan’s other member agencies were deeply
ing an unbundled rate structure.

litan’s Board of Directors voted to adopt a revised,

unbundled rate structure. On January 8, 2002, Metropolitan’s Board initiated adoption of the first

cycle of rates under the new, unbundled rate
development process was underway, Metrop
and charges to be implemented under the nev

affirmative vote of SDCWA’s representative:

structure. Beginning in February 2002, once the rate
litan held public hearings on the recommended rates
rate structure. On March 12, 2002, with the

on Metropolitan’s Board, Metropolitan adopted

specific rates and charges to be effective on January 1, 2003, pursuant to the rate structure adopted

in 2001. Metropolitan’s unbundled rate struc

remained in effect for over a decade.

ture and the rates and charges that comprise it have

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City of Los Angeles Department Of Water And Powe!

*s Answer To Petition For Writ of Mandate and Complaint0 ON DOBRO

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

9. 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 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 and Water
Stewardship Rate transportation rate components, it does so as part of the sale of full service
water—the other 5% of the time Metropolitan charges these components as part of its rate for
wheeling service, as discussed below. Metropolitan’s Supply Rates and System Power Rate are
charged as part of the rate for full service water 100% of the time. All full service customers must
pay all of the full service water rate components. Because of the volumetric nature of the rate
components, full service customers pay each rate component in direct proportion to the amount of
water that they purchase.

10. The Supply Rate components of Metropolitan’s full service water rate recover costs
to maintain and develop water supplies needed to meet the member agencies’ demands. These
costs include capital financing, operating, maintenance, and overhead costs for storage in
Metropolitan’s reservoirs. These costs are generally recovered through the Tier 1 Supply Rate.
However, if purchases in a calendar year by a member agency that executed a purchase order
exceed 90% of its base firm demand (an amount based on the member agency’s past annual firm
demands), that member agency must pay a higher Tier 2 Supply Rate. If a member agency did not
execute a purchase order, the member agency must pay the higher Tier 2 Supply Rate for any
amount exceeding 60% of its base firm demand.

11. During its Cost of Service 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.

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City of Los Angeles Department Of Water And Power’s Answer To Petition For Writ of Mandate and ComplaintThis stored supply is equally available to all member agencies should they need to utilize it.
Metropolitan categorizes drought storage as a supply cost, and ultimately allocates drought storage
to its Supply Rates which every member agency pays on a volumetric basis.

12. The System Access Rate generates revenues to recover the capital, 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 service 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 associated with maintaining additional distribution capacity
and help meet peak demands. The System 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 facilities to the member agencies. Metropolitan allocates
transportation costs associated with the SWP to the System Access Rate and the System Power
Rate the same way it allocates such costs associated with the Colorado River Aqueduct.

13. The SWP transportation costs are properly allocated to the System Access Rate and
System Power Rate because they constitute conveyance costs that Metropolitan is legally allocated
through its contract with the California Department of Water Resources (the “DWR Contract”).
The DWR Contract allocates to Metropolitan the costs of transporting water to it. Specifically, it
allocates to Metropolitan the 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 to 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 for none of them. And Metropolitan must pay the bulk of these SWP
transportation costs regardless of the amount of SWP water (i.e., water supply) that it receives.
Moreover, Metropolitan at times uses the SWP facilities for no supply-related purpose at all—as
discussed above, Metropolitan 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.

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City of Los Angeles Department Of Water And Power’s Answer To Petition For Writ of Mandate and ComplaintoOo NIN DH PF WN |

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14. Metropolitan is able to ee allocate its SWP transportation costs to the

System Access Rate and System Power Rate because Metropolitan is billed separately for SWP
Transportation Charges that the SWP. contract legally allocates to it and the costs of obtaining an
SWP water supply. Therefore, through DWR's bills, Metropolitan is able to disaggregate (1) the
costs Metropolitan incurs to purchase SWP whiter 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 ageney’s burdens on, or benefits received from, the

conveyance system.

15.

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 cq
water that must be imported and conveyed thr.

defer the need for conveyance system capacity

servation of water which reduce the volume of
ugh Metropolitan’s system, and thus reduce and

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 conv
of capital expenditures by Metropolitan which|
applicable to all member agencies, all member
they receive no funding for a particular demant

continues to receive, demand management pro}

eyance benefits, including the reduction or deferral
would be funded through transportation rates
agencies pay the Water Stewardship Rate, even if
d management program. SDCWA has received, and

gram funding. While SDCWA’s legal challenges to

Metropolitan’s water rates triggered a contractpal Rate Structure Integrity clause which terminated

several of SDCWA’s demand management pr

grams, SDCWA remains among the highest

recipients of Metropolitan’s demand management program funding.

16. Because the conservation and |

cal supply programs funded by the Water

Stewardship Rate provide conveyance serviced and benefits and avoided conveyance costs, and

because there is no Metropolitan water supply

created through the programs (only local water
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City of Los Angeles Department Of Water And Power’s Answer To Petition For Writ of Mandate and Complaintwn

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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 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
y prop

Water Stewardship Rate is allocated to a mei

agency purchases or requests that Metropoli

member agency bears a fair or reasonable rel:
on, the conveyance system.

17. Metropolitan also recovers its

er agency based on the volume of water that
convey to it. This manner of allocation to a

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

tandby 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

18. Metropolitan’s Readiness-to-S|

Charge.

erve 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 costs (i.e., st

rage which provides operational flexibility in

meeting peak demands and flow requirements), and costs incurred to stand by and provide

services during times of emergency or outage}

of facilities. Each member agency’s Readiness-to-

Serve Charge is based on that agency’s ten-year rolling average of past total consumption, i.e., all

firm deliveries including water transfers and ¢

19. The Capacity Charge is intend
Metropolitan’s system, while providing an ins
Metropolitan’s system to meet peak day dem

based on that agency’s maximum summer day

September 30 for a three-calendar year period.

20.
Metropolitan’s costs associated with member

any given year, for any reason, the Readiness

changes that use Metropolitan capacity.

ed to pay for the cost of “peaking” capacity on
entive for local agencies to decrease their use of
inds. Each member agency’s Capacity Charge is

demand placed on the system between May 1 and

To the extent that Metropolitan’s volumetric rates do not capture the entirety of

agencies’ fluctuating demands between and within

to-Serve and Capacity Charges recover the

reasonable costs of standby and peaking, respectively, or the reasonable costs of conferring the

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City of Los Angeles Department Of Water And Power’

's Answer To Petition For Writ of Mandate and Complaint0 Oo ND WH BF WN

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benefit of standby and peaking capability. The Readiness-to-Serve and Capacity Charges are

allocated among member agencies based on their historical usage of conveyance services. This

manner of allocation to a member agency be:

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 watet, it pays more through Metropolitan’s volumetric

tates.

D. Metropolitan’s Rate For Wheeling Service

21. Metropolitan’s current rate for

heeling 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-l

y-case basis.

22. 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
are inconsistent with the allegations SDCWA
SWP costs, including conveyance and power

costs must supposedly be allocated solely to

for the wheeling transaction. These cost allocations
now asserts — more than 15 years later — that all
costs, and water conservation and demand program

Vietropolitan’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 modi
23. | When Metropolitan first adopt

written findings, pursuant to the Wheeling Sta

fied in 2003 by the unbundled rates.
ed its rate for wheeling service in 1997, it made

tute, which concluded that allocating SWP

8

City of Los Angeles Department Of Water And Power’

's Answer To Petition For Writ of Mandate and Complainttransportation costs, and costs to incentivize local resource development programs, to its general

rate for wheeling service results in a rate that charges fair compensation. These findings are

embodied in Metropolitan’s Resolution 8520.
Metropolitan found that it was appropriate to include a portion of its fixed SWP

24.
responsible for, and benefit from those costs. For instance, Metropolitan’s payment of SWP

conveyance charges in its general rate for wheeling service because wheelers are partially
transportation costs pursuant to its contract with DWR, gives Metropolitan the right to wheel
water through the SWP on behalf of its member agencies. When Metropolitan uses the SWP to

wheel water on behalf of its member agencies, it does so without having to pay an otherwise

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applicable facilities fee because it has already paid for this service by paying the fixed
Transportation Charges under the DWR Contract. Under this contract, Metropolitan agreed to pay

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its allocated share of the costs of the SWP facilities, whether Metropolitan receives water or not,

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and whether it wheels water for its member agencies or not. Metropolitan recognized in its 1997

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Resolution that if wheelers did not bear a portion of Metropolitan’s fixed SWP conveyance costs,

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then they would gain an unfair subsidy from Metropolitan’s full service customers. Because every

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member agency that wheels water pays the System Access Rate on a volumetric basis, each

wheeler pays a portion of Metropolitan’s system-wide SWP costs in direct proportion to the

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amount of water that Metropolitan wheels to that agency.
Metropolitan also found that the costs for water conservation projects and financial

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system, including wheelers, and should therefore be recovered in part through the rate for

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assistance for water recycling and groundwater recovery facilities provided benefits to the whole

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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

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capacity to convey water through Metropolitan’s system, reducing the need to invest in
development of additional expensive water delivery infrastructure, and allowing more wheeling

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transactions to take place.
supply, water purchases and conveyance from non-Metropolitan third-party providers, purchases

Member agencies have options regarding water supply including local water

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City of Los Angeles Department Of Water And Power’s Answer To Petition For Writ of Mandate and Complaint

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oofrom Metropolitan, or purchases from third-party providers and conveyance using Metropolitan

services and facilities. Metropolitan’s charges are incurred only if an agency elects to purchase

water from Metropolitan, and/or use Metropoljtan’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 Metropoljtan’s property (water). Conveyance charges,

including Metropolitan’s wheeling charges, an

e 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. SDCWA’s Benefits From MWD’s Operations and Agreements

27. | SDCWA receives numerous b
structure as a whole. The long list of policies
or taken by the Metropolitan Board that hav
include the following. Many of these were a
deferential to specific concerns that SDCWA|
provide a direct financial benefit to SDCWA

a. “Postage Stamp” Rate:
amount for conveying water, regardless of ho
supply source. This has been likened to a “pq

transporting a letter down the street or across

the farthest away from Metropolitan’s water

snefits from MWD’s democratic and cooperative
programs, agreements, and other actions adopted
e financially or operationally benefited SDCWA
dopted or approved with provisions that were

had raised or, in some cases, were negotiated to

A.

Metropolitan charges its member agencies the same
ww close or how far the member agency is to the
stage stamp” having the same cost whether it is

the country. SDCWA is the member agency that is

supply sources (from Northern California and the

Colorado River) and benefits the most from this “one price to all” transportation rate structure.

b. Salinity Goal: Metropplitan’s Board adopted a 500 TDS (total dissolved

solids) salinity goal in response to SDCWA’:
supplies and the impacts to SDCWA. SDCW

concerns about high salinity in the Colorado River

‘A receives the primary benefit of this measure, and

10

City of Los Angeles Department Of Water And Powel

*s Answer To Petition For Writ of Mandate and Complaintthose benefits extend to the supplies under the Exchange Agreement between SDCWA and

Metropolitan (see below).

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 ro!
calculating the Readiness-to-Serve Charge
average).

d. Interim Agricultural

ling average of Metropolitan deliveries for

base (rather than the previous three-year rolling

[Water Program (“IAWP”) and IAWP Phase Out:

As the largest agricultural water purchaser arnong 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

Supply Allocation Plan (“WSAP”) formula.

e. Skinner Treatment Play

shortage allocation under Metropolitan’s Water

it 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 Skii

nner 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 i
2008) for SDCWA to use its own reservoir:

g Point of Delivery and
policy is that it delivers water to the boundary}
agency must pay for infrastructure within its

SDCWA. It allowed Metropolitan pipes and

centives totaling $17.6 million (2004 through

to help offset system capacity constraints.

Cost of San Diego Pipelines 1 to 5: Metropolitan’s
of a member agency’s service area and a member
lown service area. Metropolitan waived its policy for

facilities serving SDC WA to be constructed six

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City of Los Angeles Department Of Water And Powe}

s Answer To Petition For Writ of Mandate and Complaint0 Oe ND WH BF WN

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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 Plahs: 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-bas¢d” 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 statutary preferential rights while providing equity among
member agencies.

28. Under the amended Exchange Agreement between SDCWA and Metropolitan
entered into in October 2003 (“Exchange Agreement”), involving the exchange of water, SDCWA
chose to pay the System Access Rate, System| Power Rate, and Water Stewardship Rate in return
for numerous benefits it received as part of the consideration package, including:

a. State Funding: Metropolitan 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 Coachella 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

12

City of Los Angeles Department Of Water And Power’s Answer To Petition For Writ of Mandate and ComplaintoOo ND HW FF WN

YR NY NY KN KR NRK Ne Bee we we ee Be Be
oI AA KF OH F&F SF GHA A A RF HNH BH S

SDCWA equivalent to the full amount of the Imperial Irrigation District (“IID”) transfer and
canal lining water in each calendar year that the Exchange Agreement is in effect, in regular
monthly intervals. In contrast, if this were a wheeling transaction, the law (California’s Wheeling
Statute) only requires Metropolitan to deliver water when and 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 altogether. For example, if Metropolitan
requires the use of its system to move its own water supplies at all times the facilities are in
operation (i.e., when there are not outages due to maintenance or repairs), Metropolitan would
have no legal obligation to deliver the water to SDCWA. In contrast, the Exchange Agreement
ensures that 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 IID and SDCWA, as occurred in 2011, Metropolitan delivers
Metropolitan’s supplies to SDCWA to fill the gap.

d. Blended Exchange Water: IID’s transfer water and the canal lining water
consists only of Colorado River water, which has the highest salinity content of Metropolitan’s
two sources of water supply. Under the Exchange Agreement, Metropolitan provides Exchange
Water to SDCWA from whatever supply source and using whatever delivery facilities as
Metropolitan determines. The result generally is blended water, consisting of California State
Water Project water blended into the Colorado River water. This greatly improves the quality of
the water SDCWA receives, providing acknowledged water quality and operational benefits to
SDCWA. And, when Metropolitan shuts down the Colorado River Aqueduct for maintenance or
repairs, Metropolitan 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 Metropolitan’s System Access Rate, which is part of both Metropolitan’s rate structure
and the Exchange Agreement’s price provision. The SWP makes achieving the lower salinity

levels possible. By law (the California Wheeling Statute), Metropolitan is only required to deliver

13

City of Los Angeles Department Of Water And Power’s Answer To Petition For Writ of Mandate and Complaintto SDCWA the high-salinity, IID transfer and canal lining Colorado River water.

e. System Power Rate: 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 costs. 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 resources + SDCWA avoids paying that share of the

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

2012.

2 Exchange Water as a Local Supply: Metropolitan agreed to account for

the Exchange Water as a local supply in the

ontext of Metropolitan’s 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 Colorad
Metropolitan, SDCWA has not owned any ri;

River Supply: Since the merger of SDCWA into

shts 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
Metropolitan and Coachella Valley Water Dit
tight to use Colorado River water that is unus

SPECIFIC AFF}

existing Colorado River water contractor; and

strict, as Colorado River contractors, would have the
sed by IID.

IRMATIVE DEFENSES

LADWP asserts the following affirmptive defenses to the claims for relief made against it

in the Complaint without admitting it has the;
//1/
11
11

burden of proof on any of the issues raised below:

14

City of Los Angeles Department Of Water And Poweg’s Answer To Petition For Writ of Mandate and ComplaintCo em ND WH BF WN

NN YN NNN DN NY Hee we ee Be ee ee
oN DA A FF YW YH F&F SGD we IN DH BF WKH SK So

First Affirmative Defense

(Failure to Name

Real Parties in Interest)

(Applicable to First Through Third Causes of Action)

LADWP incorporates by reference the; General Allegations stated above.

SDCWA fails to name the 25 other Metropolitan member agencies, whose interests are

directly at issue in this litigation and in whose]absence complete relief cannot be accorded among

SDCWA and Metropolitan, pursuant to Code

of Civil Procedure Section 389(a).

Second Affirmative Defense

(Failure to State Facts Suffici

ent to Constitute a Cause of Action)

(Applicable to First Through Third Causes of Action)

LADWP incorporates by reference the General Allegations stated above.

SDCWA fails to state facts in its Com

which relief can be granted. Among other gr

plaint sufficient to constitute a cause of action upon

unds, neither Proposition 13, i.e., Article XIII A, § 4

of the California Constitution (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.e., Article XIII C, Sectian 1, subdivision (e) (adopted by Proposition 26), nor

California Water Code § 1810 ef seg. are app!

licable to the facts alleged in the Complaint.

Third Affirmative Defense

(Statute

of Limitations)

(Applicable to First Through Third Causes of Action)

LADWP incorporates by reference th
SDCWA’s claims are barred in whole
including, but not limited to, §§ 338(a), 335.1)
Procedure. Further, Metropolitan issued its fi

new rate structure components on September,

General Allegations stated above.

or in part by the applicable statutes of limitations,
», 343 and 860 of the California Code of Civil

rst of many water revenue bonds incorporating the

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 this case was filed. Therefore, any challenge to the rate structure

components is barred by the statute of limitat}

ions in the validation statute. Cal. Code Civ. Pro.

15

City of Los Angeles Department Of Water And Powe!

Ps Answer To Petition For Writ of Mandate and Complaint0 ON DWH F YW NY |

NN YN NY NN RV Se Se Be eB Be we Se Be eS
BNRRRRBRRBE See WABDEBHRAS

§ 860; see Aughenbaugh v. Board of Supervis

rs, 139 Cal. App. 3d 83, 87-91 (1983).

Fourth Affirmative Defense

(Untimely Claim)

(Applicable to First Through Third Causes of Action)

SDCWA’s claims are barred, in whol:

LADWP incorporates by reference the| General Allegations stated above.

¢ or in part, to the extent they may implicate the

following provisions, because SDCWA failed! to timely file a claim as required by California

Government Code §§ 901, 911.2, 911.3, 911.4 and 946.6, and the Metropolitan Water District of

Southern California Administrative Code §§

300-9310, and failed to timely file a court action

relieving it from its failure to timely present alclaim, as required by Government Code §§ 945.4

and 946.6, and the Metropolitan Water Distri

t of Southern California Administrative Code. Asa

consequence of the foregoing, SDCWA’s claims are barred, to the extent they may implicate the

foregoing provisions, as untimely.

Fifth Affirmative Defense

(Laches)

(Applicable to First Through Third Causes of Action)

LADWP incorporates by reference the

SDCWA’s claims are barred by the d

General Allegations stated above.

ctrine of laches.

Sixth Atma Defense
(Exercise of Administrative Discretion)

(Applicable to First Through Third Causes of Action)

LADWP incorporates by reference the General Allegations stated above.

Metropolitan has no ministerial duty
SDCWA. Rather, the legal directives under

of water rates to Metropolitan’s sound discre|

to structure its rates in the manner alleged by
which Metropolitan operates broadly leave the design

ion 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,” C:

be uniform for like classes of service through

4l. Water Code § 109-133, and that those rates “shall
out the district,” id, at § 109-134. Beyond this,

16

City of Los Angeles Department Of Water And Powes

xs Answer To Petition For Writ of Mandate and Complaint0 em YN DW F WN

RY NM BY NY YN NN Nee we we ee ee ee
oN A A BF BH -& DBD we IY DH BF WY SK SF

decisions as to the detailed structure of its rates are left to Metropolitan’s sound discretion.
California courts have recognized that “[s]ubstantial deference must be given to [Metropolitan’s]
determination of its rate 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, 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. |

Seventh f irmative Defense
(Governmental Immunity for Exercise of Discretion)
(Applicable to First Third Causes of Action)

LADWP incorporates by reference the'General Allegations stated above.

Metropolitan’s classification and seting of its rates, allocation of its rate structure
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

the requirement in the MWD Act that Metropolitan’s Board of Directors act by majority vote.

(Validation by Operation of Law)
(Applicable to First ugh Third Causes of Action)
LADWP incorporates by reference the General Allegations stated above.
Metropolitan’s rate structure components and cost allocations that SDCWA challenges
have been in effect since January 1, 2003 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

17

City of Los Angeles Department Of Water And Power’s Answer To Petition For Writ of Mandate and Complaintimmediately) and similar validating acts. In pi

articular, 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 rat

The rate structure components were validated

le structure components on September 12, 2002.

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 expired at the latest in N

and nearly twelve years before this case was fj

lovember 2002, 60 days after the bond issuance —

led. 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 aft

r the bond issuance, the First Validating Act of

2003, and subsequent validating acts. The cufrent rate structure components, having been

validated by operation of law, cannot be challenged as long as they remain in use.
Ninth Affirmative Defense
(Separation of Powers)

(Applicable to First Through Third Causes of Action)

LADWP incorporates by reference th¢
SDCWA’s claims are barred in whole!

General Allegations stated above.

or in part because they seek relief that would require

the Court to unconstitutionally intrude into the functions reserved to the legislative branch of

government and violate the doctrine of separation of powers. These claims seek improper judicial

interference with Metropolitan’s quasi-legislgtive 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 Dire:

lacks jurisdiction to grant the requested relief

tors act by majority vote. Accordingly, this Court

Tenth Affirmative Defense
(Ripeness)

(Applicable to First Through Third Causes of Action)

LADWP incorporates by reference the General Allegations stated above.

To the extent SDCWA’s claims for rél

extend beyond a facial challenge to Metropoli

ief relating to the Wheeling Statute purport to

itan’s rate for wheeling service, the claims are unripe

18

City of Los Angeles Department Of Water And Powet’s Answer To Petition For Writ of Mandate and Complaintfor 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.

Eleventh Affirmative Defense

(Applicable to First Through Third Causes of Action)
LADWP incorporates by reference the General Allegations stated above.

SDCWA’s claims are barred because

any claim for relief against Metropolitan regarding the matters which are the subject of the

Twelfth “Tren, Defense
(Res Judicata and Collateral Estoppel)

(Applicable to First Through Third Causes of Action)

Complaint.

LADWP 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

require that wheeling rates not exceed “fair c

Metropolitan’s facilities, are barred by prior |

Metropolitan Water District v. Imperial Irrig.

The statute defines “fair compensation” as “the reasonable charges incurred by the owner of the

conveyance system, including capital, mere maintenance, and replacement costs.” Water

Code § 1811(c). The statute mandates consi

determination. Water Code § 1813 (“[T]he ec

agency if it finds that the determination is supported by substantial evidence.”) SDCWA
previously challenged Metropolitan’s wheeling rates under Water Code § 1810 ef seq. on this

exact basis and lost. In JD, the court held, after conducting a detailed statutory analysis, that

nothing in the statute indicated that “fair com|

(Waiver)

DCWA has waived, relinquished, and/or abandoned

water rates violate Water Code § 1810 et seg., which
mpensation” for the conveyance of water through
tigation between SDCWA and Metropolitan,

ution District, 80 Cal. App. 4th 1403 (2000) (“1D”).

rable deference to the agency’s rate-setting

urt shall sustain the determination of the public

pensation” could not reasonably include “system-

19

City of Los Angeles Department Of Water And Powe:

Ps Answer To Petition For Writ of Mandate and Complaintwide costs,” including costs to maintain and operate portions of the conveyance system not used
by the transferor. Id. at 1426-1433. The court also held that “contrary to [SDCWA’s] assertions,
there is no evidence the Legislature acted out of a concern that . .. Metropolitan Water District . . .
[was] blocking wheeling transactions by ‘demanding unreasonable prices for access [to their

conveyance systems]’.” Jd. at 1432. That case is binding precedent, and should be deemed

dispositive under both res judicata and collateral estoppel principles.

Thirteenth Affirmative Defense
Qabteten
(Applicable to First Through Thir