Alameda Cnty. Flood Control v. Dep't of Water Res.

213 Cal.App.4th 1163

152 Cal.Rptr.3d 845

ALAMEDA COUNTY FLOOD CONTROL, etc. et al., Plaintiffs and Appellants,

v. DEPARTMENT OF WATER RESOURCES, Defendant and Respondent,Antelope Valley–East Kern Water Agency et al., Defendants, Interveners and Appellants.

C065522

Court of Appeal, Third District, California.

Filed February 15, 2013

Affirmed.

See 12 Witkin, Summary of Cal. Law (10th ed. 2005) Real Property, § 876 et seq.

APPEAL from a judgment of the Superior Court of Sacramento County, Patricia C. Esgro, Judge. Affirmed. (Super. Ct. Nos. 05AS01775 & 07AS04901)

Pillsbury Winthrop Shaw Pittman LLP, John S. Poulos, Amy L. Pierce, Darcy L. Muilenburg; Lewis Brisbois Bisgaard & Smith LLP, Greg L. Johnson; Kronick Moskovitz Tiedemann & Girard and Edward J. Tiedemann, Sacramento, for Plaintiffs and Appellants Alameda County Flood Control & Water Conservation District Zone 7, Alameda County Water District, City of Yuba City, County of Butte, County of Kings, Empire West Side Irrigation District, Kern County Water Agency, Napa County Flood Control & Water Conservation District, Oak Flat Water District, Plumas County Flood Control & Water Conservation District, Santa Clara Valley Water District, Solano County Water Agency, andTulare LakeBasin WaterStorage District.

Amelia T. Minaberrigarai, for Plaintiff and Appellant Kern County Water Agency.

Kamala D. Harris, Attorney General of California, Denise Ferkich Hoffman, Supervising Deputy Attorney General, Matthew J. Goldman and Vera Sandronsky, Deputy Attorneys General, for Defendant and Respondent, State of California, Department of Water Resources.

Bingham McCutchen LLP, James J. Dragna, Los Angeles, Colin C. West and Thomas S. Hixson, San Francisco, for Defendants, Interveners and Appellants Antelope Valley–East Kern Water Agency, Castaic Lake Water Agency, Central Coast Water Authority, Coachella Valley Water District, Crestline–Lake Arrowhead Water Agency, Desert Water Agency, Littlerock Creek Irrigation District, Metropolitan Water District of Southern California, Mojave Water Agency, Palmdale Water District, San Bernardino Valley MunicipalWater District, San Gabriel Valley Municipal Water District, San Gorgonio Pass Water Agency, and United Water Conservation District.

Best Best & Krieger LLP and Robert M. Sawyer, Sacramento, for Defendant, Intervener and Appellant, Ventura County Watershed Protection District.

Marcia L. Scully, Los Angeles, John Schlotterbeck, Heather C. Beatty and Karen L. Tachiki for Defendant, Intervener and Appellant, The Metropolitan Water District of Southern California.

DUARTE, J.

“As Mark Twain is said to have observed: ‘Whiskey is for drinking; water is for fighting over.’ ” ( County of Imperial v. Superior Court 2007) 152 Cal.App.4th 13, 18, 61 Cal.Rptr.3d 145 ( Imperial ).) As lamented nearly 50 years ago, California's water is still maldistributed relative to supply and demand, and “California's North–South war still smoulders and is far from being resolved.” (1 Rogers & Nichols, Water for California (Bancroft–Whitney 1967) California Water Plan, § 87, pp. 115–116 ( Rogers & Nichols ).)

The primary issue in this appeal after a court trial is whether the trial court properly interpreted the standard State Water Project (SWP) contract regarding how to credit water recipients (contractors) with the revenues from Oroville Dam hydropower (“Oroville” or “Hyatt–Thermalito” power). This power is now purchased by defendant Department of Water Resources (DWR) for use within the SWP, although some of it is then pooled with other SWP system power and traded or resold on the open market.

Generally speaking, plaintiffs are Northern California contractors who challenge DWR's methods, and interveners are Southern California contractors who defend the status quo.

The trial court found the contract was ambiguous as to whether the term “total revenues” as used in a key contract provision required valuing Oroville power at market rates as plaintiffs contend, but found the long course of dealings between the parties—a “practical construction” of the contract—refuted this construction. The trial court also found, as a matter of law, that the contract did not require DWR to treat profits from the so-called “resale” of system pool power towards that revenue. The trial court found these two interpretative conclusions resolved all issues. The judgment validates the status quo.

We agree with the trial court's ultimate interpretive resolutions, but do not entirely accept the trial court's reasoning. We hold the contract is not ambiguous on the subject of market rates, because its language—when read in light of governing law—is not reasonably susceptible of a reading that requires application of cur rent market rates. In 1967, DWR signed a 50–year “Power Sale Contract,” agreeing to sell power—evidently at then-current market rates—to several utilities. Later, DWR took over that Power Sale Contract, in effect paying itself what the utilities had been paying to DWR. DWR was statutorily authorized to continue making to itself the payments that the utilities had previously made. The relevant statutes permitted DWR to do what it has been doing.

On the question of what plaintiffs generally refer to as “resales” of pooled system power, we conclude that DWR acted within its statutory authority in the manner in which it treated profits due to resales of Oroville power, and any arguable contractual ambiguity regarding this treatment is properly resolved against plaintiffs by the practical construction rule, given a 20–year period of performance without challenge to DWR's administration of the contract.

We agree with the trial court that reaching these two ultimate interpretive conclusions vitiates plaintiffs' bad faith claim.

Accordingly, we shall affirm the judgment, and dismiss as moot a protective cross-appeal filed by interveners.

Further undesignated statutory references are to the Water Code.

“The SWP serves the domestic water needs of approximately two-thirds of all Californians, with the [Metropolitan Water District of Southern California (MWD) ] receiving about half of the SWP's water delivery. [Citations.] Due to environmental concerns, however, construction of the entire SWP project has never been completed, resulting in the annual delivery of only about half of the 4.2 million acre-feet of water projected.” ( Bay–Delta, supra, 43 Cal.4th at p. 1155, 77 Cal.Rptr.3d 578, 184 P.3d 709.)

The parties on appeal—apart from DWR—are SWP contractors, assignees or successor entities.²

Given the size of the SWP and the many conflicting economic, regional, and political interests, the contract details were hotly debated, and the trial court, in an understatement, found that the “respective positions and suggestions ... were not harmonious.”

On January 21, 1960, Governor Edmund G. “Pat” Brown issued “Contracting Principles for Water Service Contracts.” Principle No. 4 partly stated most users would pay the actual cost of power to deliver water, large landholders would pay market value, and when power was “available for sale, it will be sold at its market value.” “The difference between the actual cost and the market value” of power would yield a “power credit” to “reduce the cost of project water” except for large landholders.³ The “cost of project water” was not defined.

The statutes authorizing the SWP, popularly referred to as the Burns–Porter Act, were submitted to and passed by the voters at the November 8, 1960, General Election, as Proposition 1.⁴ “After the contracting principles were published, but before the Act was approved by the voters, [DWR] entered into its first local water supply contract pursuant to the Act with MWD. The contract was negotiated on the basis of the contracting principles, and was contingent on the Act's later approval. Negotiations were of statewide significance because it was generally recognized that the contract would be the prototype for all later Project contracts, for article 45 of the MWD contract required that the basic terms and conditions of all later contracts be substantially uniform.” ( Goodman v. County of Riverside (1983) 140 Cal.App.3d 900, 905, 190 Cal.Rptr. 7 ( Goodman ).)

The parties agree the interpretation of the MWD contract applies to all the contracts.

Contractors must pay all SWP costs except recreation, fish and wildlife enhancement and flood control costs. Contractors pay both a “Delta Water Charge” and a “Transportation Charge.” The Delta Water Charge is the water conservation facility capital, operation, maintenance, power and replacement (OMP & R) costs, and generally is paid whether or not a contractor takes water. The Transportation Charge is the transportation facility costs, including OMP & R costs, and is levied on delivered water. A major component of the Transportation Charge is the variable cost of power to pump and deliver water to each contractor.⁵ Thus, credits to the Delta Water Charge benefit all contractors, but credits to the Transportation Charge benefit contractors as they receive water, and the farther their water travels, the more they benefit.

The Oroville Dam is the site of the Hyatt–Thermalito Power Complex, which annually produces 2.2 billion kilowatt hours of electricity. As characterized by our Supreme Court, “Power development is an essential part of the project, both to make it economically feasible and to provide the energy required for pumping in connection with the transportation of water.” ( Metropolitan Water Dist. v. Marquardt (1963) 59 Cal.2d 159, 173, 28 Cal.Rptr. 724, 379 P.2d 28 ( Marquardt ).) ⁶

Annually, the SWP consumes more power than it generates. But its power plants can operate at all hours, allowing DWR to exploit the variable price of electricity: DWR can run water pumping plants at “off-peak” times (generally at night and on weekends), when the cost of electricity is lower, and sell or trade on the open market power it produces at “on-peak”...