Irvine Ranch Water Dist. v. Orange Cnty. Water District.

1

IRVINE RANCH WATER DISTRICT, Plaintiff and Appellant, v. ORANGE COUNTY WATER DISTRICT, et al., Defendants and Appellants GOLDEN STATE WATER COMPANY, Cross-Complainant and Appellant, v. IRVINE RANCH WATER DISTRICT, Cross-Defendant and Respondent.

B329089

California Court of Appeals, Second District, Fifth Division

October 7, 2024

NOT TO BE PUBLISHED

APPEALS from a judgment of the Superior Court of Los Angeles County, Nos. BS168278, BS175192, 21STCV33390, 22STCV22517 Mitchell Beckloff, Lawrence Riff, and Amy Hogue, Judges.

Alston & Bird, Edward J. Casey, and Matthew C. Wickersham for Irvine Ranch Water District. Rutan &Tucker, Joseph D Larsen, and Jeremy N. Jungreis for Orange County Water District.

Meyers Nave, Gregory J. Newmark, and Kiana Amiri-Davani for East Orange County Water District, Yorba Linda Water District, and Mesa Water District.

Brownstein Hyatt Farber Schreck, Scott S. Slater, Christopher R. Guillen, and Jessica L. Diaz for Golden State Water Company.

Anaheim City Attorney's Office, Alison M. Kott, and Daniel J. Payne; Best &Krieger, Jeffrey W. Dunn, and Wendy Y. Wang for City of Anaheim.

BAKER ACTING P. J.

Irvine Ranch Water District (Irvine Ranch) is one of several entities that extract water from the Orange County Groundwater Basin (the Basin). The Orange County Water District (OCWD) manages the Basin pursuant to the Orange County Water District Act (the Act).^[1] One of OCWD's statutorily-provided tools for managing the Basin is a fee assessed on groundwater that a producer pumps in excess of an OCWD-set ratio of groundwater to groundwater plus water from "supplemental sources." (§ 4031.5, subds. (a), (c)(2), (j)(2).) The trial court found the statutory definition of "supplemental sources" does not include recycled water and Irvine Ranch appeals that determination. In a consolidated cross-appeal brought by Golden State Water Company (Golden State), we also consider a separate issue: whether the trial court correctly decided, via a motion for judgment on the pleadings, that Golden State has not stated (and cannot by amendment state) its own affirmative claim for water rights independent of a groundwater claim that Irvine Ranch made, but later abandoned, pursuant to a 1933 judgment.

I. BACKGROUND

A. Pertinent Provisions of the Orange County Water District Act

"To maintain an adequate level of groundwater in its territory and protect groundwater quality, [OCWD] acquires water from various sources at its own expense and discharges it from [OCWD] facilities in Orange County. This process replenishes or 'recharges' groundwater in the [Basin].... [¶] . . . [¶] [OCWD's] recharge activities effectively store water in the groundwater basin, but [OCWD] does not itself use or extract groundwater. Other entities, such as [Irvine Ranch], operate extraction wells and produce water for public drinking water supplies and for other uses." (Orange Co. Water Dist. v. Sabic Innovative Plastics US, LLC (2017) 14 Cal.App.5th 343, 358-359.) Irvine Ranch and similar entities are therefore often referred to as "producers" of water.^[2] (Wat. Code, § 60021.)

As we shall discuss in more detail, producers collectively pump the majority of their water from the Basin, but they also rely on other sources. Because it generally costs producers less to pump groundwater than to purchase water imported from outside the Basin, the Act empowers OCWD to impose limitations on, and disincentives to, groundwater extraction. (§ 40-31.5, subd. (a).)

Pursuant to the Act, OCWD commissions a report each year evaluating, among other things, the amount and cost of water produced from Basin groundwater and "supplemental sources" in the prior year, the condition of groundwater supplies in the Basin, and the probable availability of water from supplemental sources in the next water year. (§ 40-31.5, subd. (d).) Following a public hearing at which interested parties may comment on the report (§ 40-31.5, subd. (e)), OCWD holds another public hearing at which the board of directors determines whether to use certain Basin management tools in the upcoming year, including "basin equity assessments and . . . production requirements and limitations ...." (§ 40-31.5, subd. (f)(1).)

This case chiefly concerns basin equity assessments and the formula used to determine the amount of an assessment for producers. Following the public hearings just described, OCWD's board of directors may establish the next year's "basin production percentage," which is "the ratio that all water to be produced from groundwater supplies within the district bears to all water to be produced by persons and operators within the district from supplemental sources and from groundwater within the district during the ensuing water year." (§ 40-31.5, subds. (c)(2), (g)(2)(b).) In language important to resolution of this appeal, the Act defines "supplemental sources" as "sources of water outside the watershed of the Santa Ana River, excepting that portion of that watershed on and along Santiago Creek upstream of the downstream toe of the slope of the Villa Park Flood Control Dam, such as, but not limited to, water produced from the Metropolitan Water District of Southern California." (§ 40-31.5, subd. (c)(1).)

The basin production percentage does not establish a hard cap on the amount of Basin groundwater that producers may pump (either collectively or individually). Producers, however, are subject to an assessment or rebate based on whether their actual basin production percentage is greater or less than the prescribed basin production percentage. (§ 40-31.5, subds. (j)(2)-(3)(A).) As stated in the Act, proceeds from these assessments "shall be used to equalize the cost of water to all persons and operators within the district and to acquire water to replenish the groundwater supplies of the district." (§ 40-31.5, subd. (b).) Thus, in theory, once a producer exceeds the basin production percentage and begins to incur an additional charge for groundwater (i.e., the basin equity assessment), groundwater will no longer be cheaper than imported water and the producer may therefore decide to obtain water from another source.

Conversely, any producer that does not or cannot pump up to the basin production percentage (OCWD has, for instance, imposed additional limits on pumping in certain parts of the Basin to mitigate seawater intrusion) will receive a rebate.

The basin equity assessment rate may vary from year to year, it need not be uniform among producers, and, for an individual producer, it may vary between water used for irrigation and non-irrigation purposes. (§ 40-31.5, subds. (g)(2)(E)-(F).) The amount of an individual producer's basin equity assessment is determined by multiplying the amount by which the producer's groundwater production exceeds the basin production percentage by the applicable basin equity assessment rate.^[3] (§ 40-31.5, subd. (j)(2).)

This is all a bit obscure, so we shall briefly recapitulate the key points in what we have said so far. One of OCWD's tools for managing the Basin is a system of incentives encouraging producers to produce some share of their water from "supplemental sources." Each year, OCWD sets a target ratio describing the ideal proportion of production of water from groundwater and from supplemental sources. That is the basin production percentage. Individual producers who exceed this target (i.e., produce more water from groundwater than OCWD's determined target groundwater level) pay a basin equity assessment based on the amount by which their groundwater production exceeds the target.

Whether a particular water source is classified as a supplemental source has consequences for an individual producer and for the Basin as a whole. First, the classification may impact the Basin-wide target. If OCWD counts water from a particular source as a "supplemental source," the expected ratio of water produced from groundwater to water produced from groundwater plus supplemental sources will be lower and the basin production percentage will be set lower. If OCWD does not count the source as among the "supplemental sources," the basin production percentage will be set higher. For producers making use of the source in question, all other things being equal, more water produced from supplemental sources means a lower basin production percentage and a correspondingly lower basin equity assessment (if any).

B. Irvine Ranch's Water Recycling Activities

Irvine Ranch serves approximately 108,000 water service connections within an area that includes all of Irvine; parts of Tustin, Newport Beach, Costa Mesa, Orange, and Lake Forest; and unincorporated areas of Orange County. Since the 1960s, Irvine Ranch has spent millions of dollars building and maintaining a water recycling system. It currently operates two water recycling facilities: the Michelson Water Recycling Plant in Irvine and the Los Alisos Water Recycling Plant in Lake Forest.^[4]These facilities collect and treat wastewater from sources within Irvine Ranch's service area. During the 2015-2016 water year, these facilities together produced more than 22,000 acre feet of recycled water.

Since at least 2013, Irvine Ranch has taken the position that the water it recycles should be classified as supplemental source water in calculating its basin equity assessment. The interpretive dispute hardened in April 2016, when Irvine Ranch sent OCWD a letter protesting the agency's determination that recycled water does not qualify as a supplemental source. Irvine Ranch argued its recycled water qualifies as water from a supplemental source under the Act because it is outside the watershed of the Santa Ana River. Specifically, Irvine Ranch contended the Act's definition of ...