The city of Morgan Hill joins other local water retailers and property owners in awaiting the ruling in a lawsuit that could award up to $4.6 million in refunded groundwater charges levied by the Santa Clara Valley Water District.
Although only one party, Great Oaks Water Co., would be eligible for such a refund at first, a ruling entitling the well owner to a full refund of illegally collected groundwater charges could pave the way for others to file similar claims.
"We have objected in the past to the groundwater fee process precisely because it does not comply with Prop. 218," said Morgan Hill City Manager Ed Tewes. "We are anxiously awaiting (the judge's order), and we will decide our course of action."
Santa Clara County Superior Court Judge Kevin Murphy is expected to announce his ruling in the coming days, following four days of testimony and arguments in the remedial phase of the case filed by Great Oaks.
In April, Murphy found that the water district violated Prop. 218 in 2005-2006, by failing to secure voter approval for groundwater extraction charges. He also ruled that the water district violated the District Act, a state law that created the agency, by spending groundwater charge revenues for unauthorized purposes.
Although the ruling only applies to Great Oaks, other well owners including the city of Morgan Hill have said they have been subject to the same rate-setting process, and have thus been similarly harmed.
The city first objected to the groundwater charges "four or five years ago," Tewes said.
About 12,000 households in Morgan Hill are served by city water, which is pumped from the groundwater aquifer via city-owned wells and purchased from the water district. Last year, the city paid about $2.2 million to the water district in groundwater charges.
Tewes did not specify if the city is considering litigation as an option in response to the Great Oaks outcome.
Great Oaks, a San Jose company that serves about 100,000 customers, argued in court Tuesday that the provisions of Prop. 218 call for a total refund of illegally levied groundwater charges it paid in 2005-2006 - about $4.6 million - plus interest. Great Oaks also claimed it was overcharged by about $2 million due to District Act violations, and requested that amount as an alternate award for damages.
Testimony last week by forensic accountant Thomas O'Rourke listed a number of areas in which the water district overcharged customers by overbudgeting for employees, equipment purchases, and imported water contract purchases.
One of many violations identified by O'Rourke is the "double charging" of property owners for water purchased through the State Water Project. A cost of $15 million for the imported was slated for recovery in the water district's rate model in 2005-2006. At the same time, the agency had already recovered the same amount from property tax revenues, according to O'Rourke.
Water district attorney Philip Matthews argued in closing arguments Tuesday that Great Oaks is entitled to a future credit of $738,000 for groundwater charges due to district overcharges. He arrived at that number by balancing the testimonies of O'Rourke and rate-setting expert George Raftelis, a water district witness who produced a rate analysis for the local agency and determined it should have charged North County well owners slightly more than the $420 per acre foot it charged in 2005-2006.
And citing previous case law, Matthews said Prop. 218 does not allow for a refund of illegally collected taxes or fees in California.
A policy in the District Act to keep water rates for agricultural users at 25 percent or less of the rate for municipal users such as the city of Morgan Hill could complicate any possible corrective changes in the groundwater charge setting process, Tewes said.
"The voters amended the Constitution, and the Constitution trumps (the District Act)," he said. "What we believe is they're charging municipal and industrial customers more than the cost of service. If it's good policy to subsidize agricultural users, that must be paid for out of tax proceeds rather than fees."
Currently, agricultural customers pay $17.50 per acre foot of water, a rate that is subsidized in part by municipal and industrial customers in South County, who pay $275 per acre foot, and those in North County, who pay $520 per acre foot.
Longtime water district critic and San Martin well owner Bob Cerruti attended the trial that ended in a San Jose courtroom Tuesday. He said most of the allegations against the water district raised by the plaintiff were nothing new to him, as he has outlined lists of District Act violations to district staff, public gatherings, and in letters to the Morgan Hill Times for several years.
One of these violations is the expenditure of groundwater charge revenues to build a solar power project at the water district headquarters in San Jose, Cerruti said. The total cost of the solar project was about $4.6 million, he said.
The upcoming ruling is likely to influence the outcome of other lawsuits filed by Great Oaks against the water district that are pending in Superior Court. Those cases are nearly identical to the current one, requesting groundwater charge refunds for each year since 2005-2006 up to the current year, based on the same violations of state law.
In the current case, the company also asked the court to order the water district to comply with Prop. 218 by securing voter approval for groundwater charges.
Water district staff and directors have indicated they will appeal the ruling if it orders a refund on the basis of the Prop. 218 violations.
Both water district and Great Oaks representatives declined to comment on the trial until Murphy announced his ruling.
The water district has an annual budget of $305 million and employs about 750 people.
WHY YOU SHOULD CARE
It has been ruled that the district violated state laws in the process of collecting charges from Great Oaks in 2005-06. But it has used the same process for all 4,000 well owners in the county for years. A refund to Great Oaks could eventually lead to refunds for other well owners who choose to pursue them.
Michael Moore Michael Moore covers county and law enforcement issues for the Morgan Hill Times. Reach him at (408) 779-4106, ext. 202, or mmoore@morganhilltimes.com.
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