Setting rates for wheeling water has always been complicated, and it is not getting any easier. The Third District Court of Appeal issued a recent decision in Central San Joaquin Water Conservation District v. Stockton East Water District (2016) 7 Cal.App.5th 1041, clarifying the factors that owners of water conveyance facilities must consider when charging outside entities to wheel water through their systems. The decision concludes a longstanding dispute between Stockton East Water District (“Stockton East”), which built and operated a large conveyance system, and Central San Joaquin Water Conservation District (“Central”), which contracted with Stockton East to use the conveyance system to deliver water to users. The court held that rates that Stockton East may charge entities like Central for the use of its conveyance system must be set on a case-by-case basis that considers several factors.
Background on California’s Wheeling Statute
Under California Water Code section 1810, et seq., commonly referred to as the “Wheeling Statute,” public agencies must make extra capacity within their conveyance systems available to bona fide transferors of water for fair compensation. (Wat. Code, § 1810.) Water Code section 1811, subdivision (c) defines “fair compensation” as “the reasonable charges incurred by the owner of the conveyance system, including capital, operation, maintenance, and replacement costs, increased costs from any necessitated purchase of supplemental power, and including reasonable credit for any offsetting benefits for the use of the conveyance system.” The term “replacement costs” also is defined by the statute. (Wat. Code, § 1811, subd. (d).) Further, Water Code section 1813 requires public agencies to act in a reasonable manner to facilitate water transfers, and to support their determinations by written findings.
While agencies may consider all of the factors listed in section 1811 when establishing wheeling rates, the court in Central v. Stockton East explained that these are not exclusive of other considerations, and that their weight may vary depending on the circumstances surrounding each entity seeking to wheel water.
Lawsuit and the Court’s Ruling
The Court of Appeal in Central v. Stockton East affirmed a trial court judgment invalidating Stockton East’s methodology for calculating fair compensation. Stockton East sought to charge a wheeling rate based on a strict proportionate share of the total capital, overhead, maintenance, and other fixed and ongoing costs of Stockton East’s conveyance system. (Central v. Stockton East, supra, at p.1047.) Central demanded a much lower rate limited to the incremental costs directly resulting from the additional water flowing through the conveyance system. The rate sought by Stockton East would have recovered 38 percent of all Stockton East’s costs of owning and operating the conveyance system, in which 38 percent of the water flow was for Central’s benefit. The court found this approach unreasonable under Water Code section 1813. (Id. at p.1044.)
The relationship between the parties was integral to the court’s reasoning. Central was not a member agency of Stockton East, and it did not participate in or share the costs of construction of the conveyance system when it was built in the 1980s. (Central v. Stockton East, supra, at p.1045-1046.) The court distinguished the facts of another important wheeling rates case, Metropolitan Water District v. Imperial Irrigation District (2000) 80 Cal.App.4th 1403, which held that Metropolitan Water District (“MWD”) could charge a fixed per acre-foot rate “based on the amount transported without regard to the source of the water, facilities used, or the distance the water travels.” (Central v. Stockton East, supra, at p.1051.) The key distinction was that MWD’s fixed rate applied only to other member agencies, whereas MWD continued to set wheeling rates for non-member applicants on a case-by-case basis. The member agencies had directors representing them on MWD’s board, and those directors established the fixed wheeling rate for all member agencies. Central, by contrast, was simply a third-party with no similar opportunity to influence the development of Stockton East’s infrastructure or set the rates that would apply. (Id. at p.1056.)
The court held that under the Wheeling Statute, pro-rata cost allocation is not allowed for third-party customers, and rates must be set on a case-by-case basis in light of all the required factors. (Central v. Stockton East, supra, at p.1044.) Among other things, Stockton East was required to consider the incremental costs incurred by reason of Central’s use, as well as the cost of competitive alternatives. Here, competitive alternatives had to include the cost to Central of pumping groundwater, although there is no requirement that wheeling rates must be less than the cost of groundwater. (Id. at p.1048.)
The relationship between a water system conveyance owner and a potential wheeler must be considered in determining the wheeling rate. Consistent with the court’s decision, a conveyance system owner may continue to charge reasonable pro-rata rates to member agencies, considering all other factors pertinent to “fair compensation.” But when it comes to non-members, the rates must consider all the factors on a case-by-case basis.