"As Mark Twain is said to have observed: `Whiskey is for drinking; water is for fighting over.'" (County of Imperial v. Superior Court
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.
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
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.
California is the home of two huge, interrelated water projects. The federal Central Valley Project (CVP), including notably Shasta Dam, was built during the 1930's, and the SWP (including the tallest dam in the U.S., the Oroville Dam), was built during the 1960's. They exist for the following reason: "California's critical water problem is not a lack of water but uneven distribution of water resources. The state is endowed with flowing rivers, countless lakes and streams and abundant winter rains and snowfall. But while over 70 percent of the stream flow lies north of Sacramento, nearly 80 percent of the demand for water supplies originates in the southern regions of the state. And because of the semiarid climate, rainfall is at a seasonal low during the summer and fall when the demand for water is greatest; conversely, rainfall and runoff from the northern snowpacks occur in late winter and early spring when user demand is lower. [Citation.] Largely to remedy such seasonal and geographic maldistribution, while simultaneously providing relief from devastating floods and droughts, the California water projects were ultimately conceived and formed." (United States v. State Water Resources Control Bd. (1986) 182 Cal.App.3d 82, 98-100 [227 Cal.Rptr. 161]; see In re Bay-Delta etc. (2008) 43 Cal.4th 1143, 1153-1155 [77 Cal.Rptr.3d 578, 184 P.3d 709] (Bay-Delta).)
The SWP was initially authorized in 1951, and in 1960 the voters approved a then massive $1.75 billion general obligation bond measure to build "a complex system of reservoirs, dams, power plants, pumping plants, canals, and aqueducts" operated by DWR, to deliver water to "contractors" who "received entitlements to an annual amount of water in return for which they repay a proportionate share of the financing and maintenance of the SWP facilities." (Planning & Conservation League v. Department of Water Resources (2000) 83 Cal.App.4th 892, 898-899 [100 Cal.Rptr.2d 173] (PCL); see Wat. Code, §§ 12931, 12934, subd. (d), 12935.)
The parties on appeal — apart from DWR — are SWP contractors, assignees or successor entities.
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.
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.
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).)
As briefly discussed ante, the contracting principles contemplated that power would be sold at market rates. However, on this and many other points the Legislature was divided. The trial court found that, "As negotiations progressed, the concept of a market-based valuation of power was ultimately deleted from the contract." In May through July 1960, DWR and MWD exchanged proposed contract terms contemplating crediting power at market rates. But no such provision ultimately was adopted.
Instead, article 22(a) of the MWD contract (all further references to articles are to the MWD contract) as finally agreed upon by the parties reads in relevant part as follows: "The payments to be made by each contractor for project water shall include an annual charge designated as the Delta Water Charge. This charge, together with the total revenues derived during the project repayment period from the sale or other disposal of electrical energy generated in connection with operation of project conservation facilities, shall return to the State during the project repayment period all costs of the project conservation facilities including capital, [OMP&R], which are allocated to the purpose of water conservation in, above, and below the Delta pursuant to subdivision (e) of this article."
The Legislature had the power to change the MWD contract during the 1961 Regular Session; if it chose to do so, MWD had the choice whether to accept the changes. But the Legislature did not make any changes, thereby indicating its approval of the contract. (See Marquardt, supra, 59 Cal.2d at pp. 181-182, 202.) The People also approved the contract. As correctly summarized by a relevant Attorney General opinion: "When the people of the state approved the Burns-Porter Act, they enacted into law a unified system of financing the water system, including authorization for both initial financing (the bonds) and payment of long-term debt and operational costs (the water contracts). The bonds, the mandate to enter into contracts, and the pledge of proceeds are part of the single and indivisible scheme the voters accepted.
Thirty water supply contracts were signed between 1960 and 1963, and each contained similar terms, consistent with the MWD contract's uniformity provision.
Under article 1(w), the "project repayment period" extends "until all bonds secured by the pledge of revenues provided for by the Bond Act have been repaid." Proposition 1 authorized $1.75 billion in Burns-Porter Act general obligation bonds, to fund construction of the Oroville Dam and other facilities. (§ 12934; see PCL, supra, 83 Cal.App.4th at pp. 898-899.) Article 5 provides that the contract was entered into "for the direct benefit" of holders of those bonds, "and ... the income and revenues derived from [this] contract[]" were pledged according to a statutory hierarchy. (§ 12937, subd. (b).) The Hyatt-Thermalito powerplants were built with CVP revenue bonds. (See 15 McQuillin, Law of Municipal Corporations (3d ed. 2005) Municipal Bonds, § 43:10, pp. 654-655 [distinguishing the two kinds of bonds].)
Under a 1966 "Suppliers Contract," utilities sold power to the SWP at a fixed price, paid for by way of the "variable" component of the Transportation Charge paid by the contractors, which is essentially the net cost of SWP's power.
Under a November 29, 1967, Power Sale Contract, the utilities (other than LADWP) agreed to buy all Oroville power from the SWP for 50 years, or until the Hyatt-Thermalito construction revenue bonds were repaid, whichever was later. The utilities paid $16.15 million annually, based on an estimated annual generation of 2.1 billion kilowatt hours.
The parties stipulated that, "The energy crisis of 1973 caused power prices to increase to unanticipated levels." As anticipated, the utilities gave five years of notice that they were cancelling the 1966 Suppliers Contract, effective April 1, 1983. This meant, as the trial court put it, that if DWR "did nothing, after 1983 it would be selling Hyatt-Thermalito power to the utilities at a relatively low price, and likely buying power from them at significantly higher prices." However, as the trial court found, the Power Sale Contract allowed DWR to terminate it with five years of notice and "in essence step[] into the shoes of the utilities," by buying the same SWP power it had been selling to the utilities. (See §§ 11670, 11671.) DWR's outside bond counsel (now known as Orrick, Herrington & Sutcliffe) opined DWR would act "on both sides of the transaction," or "in effect contract with itself for the sale and use of Oroville Power."
But there was disagreement about what DWR should do. An "Ad Hoc Energy Committee" was created in 1976; it conducted many meetings with contractors and received many letters from them. The trial court summarized the discussions as follows:
"Whether to withdraw Hyatt-Thermalito power had substantial implications for the contractors, since DWR passed on all power costs incurred for pumping water to them. [Citation.] Withdrawal of that power also raised the issue central to the current dispute regarding how to value the power for purposes of crediting the Delta Water Charge. DWR convened the Ad Hoc Energy Committee for the purposes of addressing these issues, and sent a notice to the contractors inviting them to participate in the Committee's meetings. [Citations.] The Ad Hoc Energy Committee met many times over the next few years.
"Alternative A — The status quo, meaning that DWR would not cancel the Power Sale Contract and would continue to sell power at a fixed amount to the utilities, yet buy power at what was reasonably anticipated to be a significantly increased market rate.
"Alternative B — DWR would sell Hyatt-Thermalito power at market to the utilities under a renegotiated Power Sale Contract and buy power back from the utilities at the increasing market rate.
"Alternative C — DWR would cancel the Power Sale Contract, buy Hyatt-Thermalito power for the benefit of the SWP, and, for purposes of the credit to the Delta Water Charge, value that power at DWR's assigned amount ($14.65 million plus actual [OMP&R] costs).
"Alternative D — DWR would cancel the Power Sale Contract, buy Hyatt-Thermalito power for the benefit of the SWP, and, for purposes of the credit to the Delta Water Charge, value that power at market rate (then estimated at $50 million)."
Alternatives A and B were quickly rejected. Then, the Tehachapi Mountains reared up into the discussions. Although some water is sent to the South Bay Aqueduct, and then west to the Santa Clara Valley, most of it is "lifted into the California Aqueduct ... and eventually again lifted by a series of pumping stations over the Tehachapi Mountains for delivery and use in the Southern California region." (United States v. State Water Resources Control Bd., supra, 182 Cal.App.3d at p. 100.) The difference in transportation cost is huge. It takes more electrical power to pump water to the west, to service the Central Coast contractors, or to the south, to cross the Tehachapi Mountains and service Southern California contractors, than it takes to pump water to contractors closer to the Oroville Dam. Some interveners are west of the California Aqueduct, but most are south of the Tehachapis; plaintiffs are farther north and therefore have lower power costs for the water delivered to them.
As the trial court found:
"Alternative C would have the opposite effect; it would benefit contractors with high pumping costs, to the detriment of those with low pumping costs."
The trial court found DWR favored Alternative C for two perceived reasons, both of which concerned potential downsides to implementation of Alternative D. First, Alternative D could create a power credit so large that "contractors would pay nothing, or would be paid, to take water." Second, Alternative D could cause cashflow problems, because Oroville power revenue first went towards paying off construction bonds, and although Alternative D would pay off those bonds more quickly, DWR would have less available money in the meantime.
On September 30, 1977, DWR cancelled the Power Sale Contract, effective April 1, 1983. It was replaced by the "Fourth Supplemental Resolution," which became the "State Power Contract." In October 1978, DWR adopted a power valuation formula, set forth in its "Bulletin 132-78," incorporating Alternative C. DWR has consistently applied that formula since it terminated the Power Sale Contract. The Hyatt-Thermalito CVP revenue bonds were retired in 1994; since then, the State Power Contract has been set forth in "Project Order No. 36."
Under Project Order No. 36, DWR credits the Delta Water Charge with the same $14.65 million the utilities paid under the 50-year 1967 Power Sale Contract, but pays actual OMP&R costs — which plaintiffs concede are more than the fixed amount the utilities paid. Project Order No. 36 expires November 29, 2017, when the Power Sale Contract would have expired, had it not been cancelled.
In December 2003 — 20 years after Alternative C was implemented — plaintiff Kern County Water Agency (KCWA) (referred to as the "lead" and "largest" plaintiff) — claimed all revenue from sales or "allocable" transfers of Oroville power must be credited to the Delta Water Charge at current market rates.
Plaintiffs filed their initial complaint on April 25, 2005. After pretrial skirmishes, two cases were consolidated for court trial. Over plaintiffs' objection, the trial court bifurcated liability and damages.
On October 30, 2009, over plaintiffs' objection, the trial court issued what it styled as an "interlocutory judgment" incorporating its interpretation of the contract. This document declares as follows:
"1. Article 22(a) of the Water Supply Contracts does not mandate that the full market value of all power generated by project conservation facilities must be reflected in a credit to the Delta Water Charge, regardless of whether the power is sold outside of, or consumed within, the [SWP], or is sold for less than market value; and,
"2. [DWR's] subsequent resale of power generated by project conservation facilities, after purchasing that power under the State Power Contract, does not constitute a sale or other disposal of power under Article 22(a), so revenue from that resale is not an additional offset to the Delta Water Charge."
On May 3, 2010, the trial court granted judgment on the pleadings in favor of interveners and DWR, finding its interim ruling resolved all remaining issues.
Plaintiffs (except for Dudley Ridge Water District) timely filed this appeal after the trial court denied their motion for a new trial. Interveners (except for Littlerock Creek Irrigation District) filed a protective cross-appeal.
As we shall explain in parts I and II, although we disagree with a portion of the trial court's reasoning, we uphold the trial court's conclusion that plaintiffs have not demonstrated that DWR has breached the contract. In part III, we uphold the trial court's finding that resolution of the contract interpretation questions undermines plaintiffs' bad faith claim. In part IV, we conclude that interveners' cross-appeal is moot.
The parties agree the contract is unambiguous regarding application of market rates; however, plaintiffs claim it unambiguously means DWR must credit the Delta Water Charge with the market rate value of power, while DWR and interveners claim the contract unambiguously precludes this interpretation. We agree with DWR and interveners.
After setting forth general rules regarding ambiguity in part IA., we shall explain in part IB. why the contract does not require DWR to credit the Delta Water Charge with the market value of Oroville power. Then we shall discuss and reject arguments raised by plaintiffs in their effort to show the contrary, or at least to raise an ambiguity: In part IC., we reject claims based on a contractual provision applicable to large landholders. In part ID., we reject claims based on dictionary definitions. In part IE., we reject claims based on extrinsic documents. In part IF., we summarize our conclusions.
Importantly, "The language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity." (Civ. Code, § 1638.) "Courts will not adopt a strained or absurd interpretation in order to create an ambiguity where none exists." (Reserve Insurance Co. v. Pisciotta (1982) 30 Cal.3d 800, 807 [180 Cal.Rptr. 628, 640 P.2d 764] (Reserve Insurance).) "In the construction of a statute or instrument, the office of the Judge is simply to ascertain and declare what is in terms or in substance contained therein, not to insert what has been omitted, or to omit what has been inserted; and where there are several provisions or particulars, such a construction is, if possible, to be adopted as will give effect to all." (Code Civ. Proc., § 1858; see Civ. Code, § 1641 ["[t]he whole of a contract is to be taken together ..."].)
If extrinsic evidence factually conflicts, the trial court's resolution of that conflict is reviewed for substantial evidence, otherwise the trial court's ultimate interpretation of the contract is reviewed de novo. (See Winet, supra, 4 Cal.App.4th at pp. 1165-1166.)
As we have set forth ante, article 22(a) refers to "total revenues" as follows: "The payments to be made by each contractor for project water shall include an annual charge designated as the Delta Water Charge. This charge, together with the total revenues derived during the project repayment period from the sale or other disposal of electrical energy generated in connection with operation of project conservation facilities, shall return to the State during the project repayment period all costs of the project conservation
Therefore, "total revenues derived ... from the sale or other disposal of" Oroville power lower the Delta Water Charge, which, when added to those "total revenues" must equal — that is, "return to the State during the project repayment period" — "all costs of the project conservation facilities" allocated to "water conservation in, above, and below the Delta." As stated by the 1961 DWR contract analysis mentioned earlier (fn. 7, ante), "the Delta Water Charge repays only those conservation costs, including power costs, which are not repaid by power revenues." Larger "total revenues" lower the Delta Water Charge and smaller "total revenues" raise it.
We see nothing in article 22(a) that even hints that the "total revenues" bear any necessary relationship to market rates of electricity, rates which constantly fluctuate for reasons wholly external to the contract and to project costs.
The trial court found that statutes granting DWR discretion to set power rates were useful to resolve contractual ambiguity. But a key point — ignored by plaintiffs — is that those statutes were part of the contract: Indeed, the first paragraph of the contract stated it was entered into "pursuant to the provisions of the [Burns-Porter] Act, the [CVP] Act, and other applicable laws."
One CVP statute provides DWR "shall have full charge and control of the construction, operation, and maintenance of the project and the collection of all rates, charges, and revenues from it." (§ 11451.) Another CVP statute provides:
"Under such regulations and upon such terms, limitations, and conditions as it prescribes, [DWR] may do any of the following:
"(b)(1) Enter into contracts and agreements and do any and all things which in its judgment are necessary, convenient, or expedient for the accomplishment of the purposes and objects of this part." (§ 11454; see Stats. 1957, ch. 1932, § 293, p. 3410.)
A CVP limitation on DWR's discretion provides: "The department shall enter into such contracts and fix and establish such prices, rates, and charges so as at all times to provide revenue which will afford sufficient funds to pay all costs of operation and maintenance of the works authorized by this part, together with necessary repairs and replacements thereto, and which will provide at all times sufficient funds for redemption of all bonds and payment of interest thereon, as and when such costs and charges become due and payable." (§ 11455.)
Thus the CVP statutes, explicitly incorporated into the contract, permit DWR to set power rates, provided the rates are sufficient to operate the system and protect bondholders.
These statutes did not require DWR to pay market rate for power upon cancellation of the Power Sale Contract, but merely required DWR to pay as much as had been paid before, or, as the trial court characterized it, to "step[] into the shoes of the utilities," when DWR bought the power.
Plaintiffs repeatedly assert the California Supreme Court has held that DWR's calculation of the Delta Water Charge "`do[es] not involve opinion or discretion.'" We disagree.
Our Supreme Court addressed a claim that the payment provisions of the contract were too uncertain to be enforceable: "It is contended that some of these allocations, provided for in article 22(e), require the evaluation of imponderables on a subjective basis (i.e., involving personal opinion and discretion) and that the contract does not provide who shall make the subjective evaluations." (Marquardt, supra, 59 Cal.2d at p. 195.) In part, the court stated: "Several other provisions of the contract leave to the state determinations with respect to the water charges which involve subjective opinion and discretion, and no provision of the contract leaves any comparable determination to others than the state. The contract considered as a whole leaves no doubt that the allocations must be made by the state." (Marquardt, supra, at p. 196, italics added, fn. omitted.) The omitted footnote states: "See, e.g., articles 22 and 23 which contain provisions showing that the state shall determine which costs of project facilities are reimbursable by the contractors, and articles 24(b)(3) and 25(b) which provide that the state shall make the allocation of the `transportation charge' among the contractors." (Id. at fn. 17.)
Thus, we see nothing in article 22(a), either on its face or as it has been interpreted by our Supreme Court, to require the application of market rates.
Plaintiffs contend a "surcharge" for large landholders provided by article 30 shows that the phrase "total revenues derived" as used in article 22 must refer to or at least plausibly can be read to refer to market rates. We are not persuaded.
We shall assume for the sake of argument that the "net value" referenced in article 30(b) equates to the "market value" for power, less costs. However, as DWR correctly points out, although article 30 required payment of a surcharge by large landholders, who were customers of water contractors, the contractors themselves "continued to pay for their respective allocations of project water through the Delta Water Charge (Article 22) and the Transportation Charge (Article 26)." Other parts of article 30 required contractors to ascertain which customers were subject to the surcharge, then collect and forward receipts to DWR. But the fact that some of their customers (i.e., large landholders) may have paid a surcharge based on the market value of power under article 30 does not change the language of article 22(a), defining the Delta Water Charge paid by contractors.
Plaintiffs again seek support in Marquardt, supra, 59 Cal.2d 159. In that case, our Supreme Court upheld article 30's surcharge against claims it was unlawfully discriminatory.
Plaintiffs also point to a January 21, 1960, press conference, wherein DWR officials discussed the contracting principles, and used a hypothetical to illustrate article 30, to show small landholders would pay the actual cost of power, but large landholders would pay the market value, by means of a power credit to the small landholders. Plaintiffs reason that article 30 took away this market value power credit from large landholders. However, as we mentioned in the Background ante and later discuss in part IE.1., post, principle No. 4's call for calculating the Delta Water Charge using market rates was dropped during the contract negotiations.
Plaintiffs also point to the 1961 DWR contract analysis we referred to earlier (fn. 7, ante), which states in part: "The power credit per acre-foot is the amount of the net value of electrical energy generated ... at Oroville Dam.... It will be recalled that power cost and revenues are taken into account in the computation of the Delta Water Charge, and that each contractor thereby receives a proportionate share of the benefit of net power revenues or `power credit'. By making the power credit per acre-foot the measure of the surcharge to be levied under this article, the contract in effect recovers from certain water users a portion of the power credit accorded them under the Delta Water charge."
This discussion of article 30 does not raise any ambiguity regarding article 22(a). Like the passage in Marquardt relied on by plaintiffs discussed immediately above, this passage did not address whether "total revenues derived" must equate to market value; it described how the surcharge would be calculated. That same summary explained that "the Delta Water Charge repays only those conservation costs, including power costs, which are not repaid by power revenues." (Italics added.) Thus, the summary, taken as a whole, accurately reflected the difference between "revenues" and "net value" articulated by the contract.
Having rejected use of the term "market rate" in favor of "total revenues derived" in the final version of article 22(a), and then using "net value" in article 30(b), the parties clearly signaled a different meaning. The fact that some water customers were required to pay a surcharge based on the market value of power does not mean the Delta Water Charge paid by water contractors was also based on market value.
Plaintiffs also argue "if power used for pumping were valued at its generating cost (the bond service plus operating and maintenance costs) rather than market, as Respondents contend, and the costs were then deducted, the resulting `surcharge' would have been zero, making Article 30 meaningless." DWR appears to concede the surcharge was zero. However, the appellate record shows it was not zero, it was just much smaller than had been expected.
Plaintiffs contend dictionary definitions of "revenue" and related words import market rates into the contract "under the ordinary meaning of words" as follows: "Under Article 22(a), DWR must offset the Delta Water Charge with the `total revenues derived ... from the sale or other disposal of electrical energy generated in connection with operation of project conservation facilities.' Under the ordinary meaning of words, this requires the Delta Water Charge to be reduced by an amount that captures the true value of all money or other consideration received by DWR (`total revenues') from the disposition of [Hyatt-Thermalito] power.
Far from advancing plaintiffs' cause, these definitions stand for the unremarkable point that "revenue" means that which is gained or received back, such as interest on an investment, a meaning at odds with the "market rate" claim.
One arguable exception is a definition from a superseded edition of Black's Law Dictionary, defining "gross receipts" to mean "[t]he total amount of money or [the value of] other" consideration received. (Black's Law Dict., supra, p. 703, italics added.) But this definition does not mean that revenues that are received in money can also be deemed to have some additional value. Further, the current edition defines "gross receipts" as the "total money or other consideration" received. (Black's Law Dict., supra, p. 772; see Black's Law Dict. (7th ed. 1999) p. 710.) The prior definition was short lived because it stemmed from a sister state tax statute, and therefore was a peculiar definition, not a common definition. (See New Mexico Enterprises v. Bureau of Revenue (Ct.App. 1974) 86 N.M. 799 [528 P.2d 212, 213]; N.M. Stat. Ann. § 7-9-3.5(A)(1) ["`gross receipts' means the total amount of money or the value of other consideration received ..."], former § 72-16A-3(F).)
Thus, "total revenues derived" under article 22(a) means the amount actually derived, not the value of what might have been derived, or the market value.
Plaintiffs contend various extrinsic documents show the term "total revenues" requires application of market rates in this case. We are not persuaded.
The massive amount of extrinsic evidence proffered at trial appears to have caused the trial court to assume the contract must be ambiguous as to market rates. The trial court found the "evidence of the extensive pre-contract evaluation and formulation of the SWP ... and the intended contractual relationships between the DWR, the contractors, and the bondholders, fairly support an interpretation of the term `total revenues' as the expected product of the full market value of all power generated by project conservation facilities whether the power was sold or used within the [SWP]." This fails to explain what contract language could plausibly carry the latent meaning of "market rates" when, as we have explained, article 22(a) and the statutes incorporated into the contract facially preclude such meaning.
We find the following quotation to be apt:
"Ambiguities arise when contractual language reasonably may be susceptible to more than one interpretation based upon the offered evidence regarding the material facts. [Citation.] Under these circumstances, trial judges, acting as gatekeepers, may take a `preliminary look' at proffered extrinsic evidence to determine ambiguity, because written words may have special meanings to the contracting parties that are not apparent on the face of the document itself. [Citation.]
"An agreement is not ambiguous merely because the parties (or judges) disagree about its meaning. Taken in context, words still matter. As Justice Baxter has pointed out, `written agreements whose language appears clear in the context of the parties' dispute are not open to claims of "latent" ambiguity.' (Dore, supra, 39 Cal.4th at p. 396 (conc. opn. of Baxter, J.).)" (Abers v. Rounsavell (2010) 189 Cal.App.4th 348, 356 [116 Cal.Rptr.3d 860], italics added (Abers).)
The observation in Abers that hewing closely to the written page is important in real estate contracts applies with even greater force to the contract in this case: It was entered into between the state and MWD pursuant to statute, approved directly by the people, and implicitly approved by the Legislature. (See Marquardt, supra, 59 Cal.2d at pp. 181-182; 61 Ops.Cal.Atty.Gen., supra, at p. 379.) It is implausible to believe the parties would intend that "market rates" should reduce the Delta Water Charge, but redact that proposed term from the draft contracts and substitute "total revenues derived" therefor: Such a maneuver would obfuscate, not illuminate, the intent of the parties, and certainly would not "provide public notice and promote public reliance" on the "facial meaning" of the contract. (Abers, supra, 189 Cal.App.4th at p. 356.)
An explicit "market rate" provision was proposed but dropped, and it cannot be restored via extrinsic evidence untethered to contractual language.
The trial court, after granting judicial notice of or otherwise provisionally admitting the extrinsic evidence, should have directed plaintiffs to identify which portions of the contractual language were rendered ambiguous by which pieces of extrinsic evidence. Placing this initial analytic burden on the party claiming extrinsic evidence is relevant to interpretation is appropriate, because, "A party attacking a meaning succeeds only if the attacker can propose an alternative, plausible, candidate of meaning." (Dye, supra, 92 Cal.App.4th at p. 976.) That would have considerably lessened the trial court's burden. It is not enough for a party to unearth an archival document and assert it reveals a latent linguistic ambiguity.
We now address in detail the various types of extrinsic evidence plaintiffs claim make article 22(a) susceptible of a meaning that requires the current market rates of power be used to reduce the Delta Water Charge.
Plaintiffs begin with Governor Pat Brown's contracting principles, specifically principle No. 4, which in part proposed that when "any power is available for sale, it will be sold at its market value."
One court has explained the general importance of the contracting principles in part as follows: "[T]he contracting principles and the MWD contract are particularly useful in interpreting this Act. They were matters of public record, widely publicized before the election. They represent a contemporary administrative directive, which was known to the voters at the time of the election. The voters were aware that all future water contracts would be implemented pursuant to the contracting principles, and by voting for the Act they approved the contracting principles. The contracting principles also were accepted by the Legislature, which, with knowledge of them, appropriated funds for the project in the Budget Act of 1960 [citation], thus indicating legislative approval of the administrative directive. [Citation.] Both the contracting principles and the MWD contract are an important source of the Act's meaning, and the Act must be construed in light of their contents." (Goodman, supra, 140 Cal.App.3d at pp. 907-908, italics added.)
Plaintiffs view this passage as establishing the primacy of the contracting principles in interpreting the contract. But the general statement that the contracting principles were known to the voters and are relevant to interpreting the contract does not mean that every aspect of the principles was endorsed by the parties, the voters, or the Legislature. The contracting principles set forth the executive branch's initial goals, not what it eventually obtained. Goodman itself merely addressed the point that the contracts were
Plaintiffs contend DWR's discretion to set rates was not revealed to the voters and therefore granting DWR such discretion would result in a fraud on the voters, in part citing a prior decision of this court emphasizing the need to protect the integrity of voter-approved bond measures. (Veterans of Foreign Wars v. State of California (1974) 36 Cal.App.3d 688, 692-697 [111 Cal.Rptr. 750]; see Peery v. City of Los Angeles (1922) 187 Cal. 753, 767 [203 P. 992].) We reject plaintiffs' premise that DWR's discretion was unknown to the voters before Proposition 1 was adopted.
A critical component of the plan was that DWR would enter into contracts that would repay the project costs, and this point was stressed before the 1960 General Election. (See Antelope Valley-East Kern Water Agency v. Local Agency Formation Com. (1988) 204 Cal.App.3d 990, 993 [251 Cal.Rptr. 593]; Goodman, supra, 140 Cal.App.3d at pp. 905-906 & fn. 3.) In the official ballot materials, the Legislative Counsel explained that "surplus project revenues" would first be expended on the "`State Water Facilities'" and when no longer needed for such purpose, "could be expended upon any facilities" of the SWP. (Ballot Pamp., Gen. Elec. (Nov. 8, 1960) analysis of Prop. 1 by Legis. Counsel, p. 3 (Ballot Pamp.).) The Legislative Counsel also explained that DWR would "enter into contracts for the sale, delivery or use of water or power ... subject to such terms and conditions as may be prescribed by the Legislature" so long as they did not impair the rights of outstanding bondholders. (Ibid.)
The proponents of Proposition 1 argued in relevant part: "The program will not be a burden on the taxpayer; no new state taxes are involved; the bonds are repaid from project revenues, through the sale of water and power. In other words,
In short, the contracting principles do not override the language of the contract or applicable statutes, and do not render the contract ambiguous as plaintiffs posit.
Plaintiffs rely on legislative reports favoring market rates, issued in early 1960. But as interveners stress, not all legislative reports favored using market rates, and a minority report not mentioned by plaintiffs explicitly opposed using market rates. As interveners point out, "The recommendations of these committees were just that — recommendations. They were not binding
Plaintiffs argue, "It is illogical to believe that a Legislature so keenly aware of the no-preference-to-public-agencies mandate of section 11626 actually intended to authorize DWR to grant a preferential rate when it sold Oroville power to itself." This overlooks the fact DWR had the authority power to determine what an equivalent offer was, and assumes DWR granted itself a preferential rate, rather than an equivalent rate to what the utilities paid. Thus, we reject plaintiffs' claims based on section 11626.
Plaintiffs complain that the trial court misinterpreted a January 20, 1960, speech by Governor Pat Brown announcing the contracting principles, and dispute the admissibility of a document reflecting that speech.
Plaintiffs fail to point out where they objected to this document, fail to properly head an argument in their opening brief contesting the trial court's ruling admitting this document, and bury their legal points in footnotes. We
Moreover, plaintiffs concede the speech "added nothing of substance" to DWR statements made at a press conference about the contracting principles held the next day. DWR proposed that small landholders first would get a market value credit for surplus power revenues (lowering their Delta Water Charge), and then would pay actual power costs for deliveries, whereas large landholders would be charged market value for the power to deliver water (raising their Transportation Charge). But such statements, like the contracting principles, predate and cannot supersede the final contract language.
For all of the reasons we have outlined ante, we disagree with the trial court's finding that the contract is ambiguous in the manner posited by plaintiffs. The contract cannot plausibly be read to compel DWR to credit the Delta Water Charge with the market value of Oroville power, rather than the "total revenues derived" from that power, as provided in article 22(a).
In their initial briefing, plaintiffs challenged the trial court's conclusion that when DWR sells SWP "pool" power on the open market, any "profits" traceable to Oroville power do not need to be credited as part of the "total revenues" that reduce the Delta Water Charge under article 22(a). We requested supplemental briefing to clarify the positions of the parties on this question.
We conclude that DWR has acted within its statutory authority in the manner in which it has treated "profits" due to resales of Oroville power it has already purchased for the SWP, and any arguable contractual ambiguity regarding this treatment was properly resolved against plaintiffs by application of the practical construction rule.
DWR posits that it manages a systemwide "pool" or "portfolio" of energy from several sources, and once it pays for Oroville power and adds it to that pool, it is no longer Oroville power, the revenue from which must be used to reduce the Delta Water Charge. The power it "sells" to the SWP — acting "on both sides of the transaction" — becomes part of the system "pool," either used within the SWP or sold or traded outside the system, depending upon project needs, and, "In either case, the value of this power ... offsets the cost of transporting water" by reducing the Transportation Charge.
SWP's total power includes Oroville power as well as power from the various recovery plants (see fn. 10, ante), power bought from utilities, and power from "off-aqueduct" plants located away from SWP facilities, and DWR consistently treated all of this as a system "pool" of energy.
DWR's view is reflected by DWR's long range energy program described in Bulletin 132-78, which contemplated sales of excess power resulting from
Section 11670 authorized DWR to engage in self-dealing by taking over the 1967 Power Sale Contract. That statute provides in full: "Any contract or lease made by the department with any person, other than a state agency, providing for the furnishing by the department of water, the use of water, water storage, electric power, or other service for resale shall be subject to cancellation by the department upon five years' notice, and such a contract or lease shall be so canceled in whole or in part whenever the State or any financially responsible state agency makes application for the water, use of water, water storage, electric power, or other service, or any part thereof, covered by the contract or lease and enters into a contract or lease binding itself to take the water, use of water, water storage, electric power, or other
DWR was a "financially responsible state agency" that bound itself to "pay for" Oroville power at the same price paid by the utilities, as permitted by section 11670. Section 11671 required that DWR had to "receive and be paid a total revenue or consideration at least equal to that which would be received by it were the contract ... not canceled, and within the unexpired portion of the term of the contract." (§ 11671, italics added.) DWR was not required to "receive and be paid" a penny more. The "total revenue or consideration" described in section 11671 effectively equates to the "total revenues derived" from the sale of Oroville power described in article 22(a).
Thus, DWR's interpretation of "total revenues" to exclude resales traceable to Oroville power is both plausible and statutorily authorized.
Indeed, having followed the statute by agreeing to "pay for" the Oroville power at the same rate that the utilities paid, by using SWP monies, DWR transferred any right to that power to SWP. By common sense and common definitions, when one has paid for something, one owns it. (See 2 New Century Dict., supra, at p. 1265 [to pay is to "compensate, as for goods supplied or services rendered"]; Little, Shorter Oxford English Dict. (3d ed. 1944) p. 1452.) Indeed, plaintiffs at argument appeared to concede as much. Had the Legislature intended some other meaning, it would not have used the term "pay" when it adopted section 11670. And, as explained earlier, the water supply contracts explicitly incorporated the CVP statutes, including section 11670. Therefore, it was within the contemplation of the parties that DWR would "pay for" and therefore own the Oroville power, which is no longer part of the "total revenues" used to reduce the Delta Water Charge.
Plaintiffs contend that although Oroville power sold to DWR creates revenue "derived" from the "sale or other disposal" of that power under article 22(a), if and when DWR chooses to resell that same power, it derives
Even if we assumed, for the purposes of argument, that plaintiffs have tendered an alternate permissible candidate of meaning, we would uphold the trial court's finding that DWR's candidate of meaning is correct, based on evidence that, for at least 20 years, plaintiffs accepted DWR's interpretation without formal protest.
The statement of decision details overwhelming evidence credited by the trial court — including by some of plaintiffs' witnesses — showing that, no later than 1983 — if not 1978 — the contractors knew DWR would value power and allocate revenue in accordance with Alternative C, and thereafter DWR issued yearly statements showing that resales were not credited toward article 22(a)'s "total revenues," yet plaintiffs did not raise the issues tendered by this case until 2003. Indeed, a 1988 KCWA report emphasized at oral argument praised DWR's handling of power sales, which were used "to hold down increases" in system power costs.
Factually, plaintiffs contend they made "annual generic protests of DWR's cost allocations under the Contracts" well before 2003. But on appeal, they
In arguing that their long — and still unexplained (see fn. 41, post) — failure to formally protest DWR's practices is not significant, plaintiffs rely on Riverside Heights Water Co. v. Riverside Trust Co. (1906) 148 Cal. 457 [83 P. 1003] (Riverside Heights). That case does not support their contention.
In Riverside Heights, a canal was built under contracts calling for landowners along its course to pay for maintaining the canal, in exchange for the right to certain amounts of water. Later, the canal was extended to service other lands, across an arroyo. (Riverside Heights, supra, 148 Cal. at pp. 460-461.) The trial court found the landowners were not liable for the expenses of maintaining the canal extension because the "canal" referred to in their contracts was the original canal. (Riverside Heights, supra, at pp. 461-463.) Our Supreme Court held the trial court properly considered extrinsic evidence to conclude no canal extension had been anticipated. (Id. at pp. 464-466.)
The portion of the opinion relied on by plaintiffs reads: "It is claimed that the respondent, by making payments of the amounts claimed by the appellant and by other acts which are said to show a recognition of or acquiescence in the claim of an obligation so to do, has, by estoppel or otherwise, bound itself to a construction of the contracts in accordance with appellant's claims and contrary to the findings. We think this claim is untenable. There are no circumstances from which an estoppel could arise. And while in the case of an ambiguous contract the conduct of the parties may be proved to aid in its interpretation, yet it is not conclusive evidence thereof, and it may be disregarded in favor of more satisfactory evidence to the contrary. With the conclusion of the lower court on such conflicting evidence we cannot interfere." (Riverside Heights, supra, 148 Cal. at p. 467.)
Plaintiffs also contend the 1967 Power Sale Contract reflected a market rate for power, and argue this undermines the "practical construction" rule as applied to the subsequent conduct of the parties, because Alternative C represented "a belated change" in DWR's "consistent implementation" of the contracts between contractual inception and 1983. Even if we assume the Power Sale Contract reflected long-term market rates (see fn. 9, ante), that does not mean the subsequent conduct of the parties cannot shed light on their intentions at the time of the MWD contract in 1960. Instead, evidence of plaintiffs' delay between 1983 and 2003 was admissible and probative on the question whether DWR accurately interpreted "total revenues" in article 22(a) so as to exclude system power sales or trades. (See Oceanside 84, Ltd. v. Fidelity Federal Bank (1997) 56 Cal.App.4th 1441, 1450-1451 [66 Cal.Rptr.2d 487] [increase in rates for five years "was consistent and in no way deceptive" and party's "payments without objection and the failure to question the method of calculation" spoke to contractual intent]; Okun v. Morton (1988) 203 Cal.App.3d 805, 816-819 [250 Cal.Rptr. 220] [two-year period]; see also Employers Reinsurance Co. v. Superior Court (2008) 161 Cal.App.4th 906, 922 [74 Cal.Rptr.3d 733] ["It should not matter whether the parties' agents who originally drafted the contract participated in the performance, or have long since left the scene."].)
Accordingly, assuming plaintiffs have tendered an ambiguity regarding allocation of the proceeds or value of system power pool sales or trades, the
After issuing what it characterized as the "interlocutory judgment" interpreting the contract, the trial court granted DWR judgment on the pleadings. On appeal, plaintiffs contend they pleaded a viable claim for breach of the covenant of good faith.
The operative complaint alleged DWR acted in bad faith by "failing to credit all of the benefits derived from the sale or other disposition of electricity generated by the Hyatt-Thermalito generating facilities against the `Delta Water Charge' rather than against the `Transportation Charge.'" Plaintiffs contend that even if the contract does not require market rates, DWR had an obligation, in its good faith administration of the contracts, to apply a market rate.
Interveners concede their cross-appeal is moot if we affirm the judgment against plaintiffs. We agree. Because we affirm, we shall dismiss the cross-appeal as moot.
The judgment is affirmed. The cross-appeal is dismissed as moot. Plaintiffs (except Dudley Ridge Water District, which did not appeal the judgment) shall pay the appellate costs incurred by DWR and interveners. (Cal. Rules of Court, rule 8.278.)
Blease, Acting P. J., and Hull, J., concurred.
Further undesignated statutory references are to the Water Code.
Interveners are the 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, Metropolitan Water District of Southern California (MWD), Mojave Water Agency, Palmdale Water District, San Bernardino Valley Municipal Water District, San Gabriel Valley Municipal Water District, San Gorgonio Pass Water Agency, and the United Water Conservation District. The Ventura County Watershed Protection District and Littlerock Creek Irrigation District were defendants and later treated as interveners, but only the former joined in the cross-appeal.
The full text of principle No. 4 is found in footnote 22, post.
Article 22(c) sets out an algebraic formula for calculating the variable components of the Delta Water Charge and categories of cost allocation. DWR's February 10, 1961, contract analysis, admitted as a trial exhibit and mentioned at oral argument, explains that costs were to be recovered over the entire project repayment period, and the article 22(c) formula was designed to reduce such costs to "present worth."
The trial court found that in negotiating the Power Sale Contract, DWR obtained the best deal it could. This arguably equates to fair market value, or "the price which a willing buyer would pay to a willing seller, neither being under compulsion to buy or sell, and both having full knowledge of all pertinent facts." (Estate of Rowell (1955) 132 Cal.App.2d 421, 429 [282 P.2d 163].) In a trial exhibit, former Governor Ronald Reagan characterized the Power Sale Contract as "`highly satisfactory to the State.'" DWR suggests it did not obtain market price, but DWR does not challenge the finding it obtained the best possible 50-year price. It appears DWR merely means the rate did not vary with what it calls "evolving" market prices, and what plaintiffs call "short-term prices for spot sales."
In their supplemental brief, plaintiffs quote a snippet of MWD's brief in the Marquardt case, asserting MWD therein conceded market rates were required. MWD's Marquardt brief, read in context, does not concede that point, but refers to "revenues derived" from project conservation facilities. Nor would the views of one contractor bind DWR or any other contractors.
In its briefing regarding the article 30 surcharge, and at oral argument, plaintiffs suggested that because article 26, defining the Transportation Charge, provides an explicit credit for recovery power, it somehow precludes the result from Alternative C, namely, reducing the Transportation Charge for Southern California contractors. This oblique point was not separately headed and lacks coherent analysis, therefore we decline to address it. (See People v. Freeman (1994) 8 Cal.4th 450, 482, fn. 2 [34 Cal.Rptr.2d 558, 882 P.2d 249]; Loranger v. Jones (2010) 184 Cal.App.4th 847, 858, fn. 9 [109 Cal.Rptr.3d 120] (Loranger).)
"The Project will require more power for pumping purposes than it will produce. Power required in the operation of the project must be paid for by the water users whether it is obtained from project or nonproject sources. Therefore, the costs of the project facilities producing the power is properly a cost of water supply and in the project cost allocation no separate allocation of the capital costs of power facilities will be made. The capital cost of power will be included in the costs allocated to water supply. The difference between the actual cost of power, that is, the amount necessary to repay the capital and operation and maintenance costs of the power facilities, and the market value of the power provides an economic benefit. A cost allocation study will be made with reference to power facilities for the purpose of determining the economic benefit to be derived from the use of project water.
"In addition, to the extent that from time to time any power is available for sale, it will be sold at its market value. Preference will be given to public agencies in such sale as required under existing law. The difference between the actual cost and the market value of such power will result in income to reduce project costs. This added income (power credit) will be applied, and the computed economic benefit will be made available, to reduce the cost of project water except for water used on land in single ownership in excess of 160 acres (320 acres in the case of community property)."
We do note that a March 1960 legislative report discussing section 11626 claimed "present state law contemplates sale of power at market rates...." No citation was given to support the assertion that then present state law required market rates, and plaintiffs supply none in their briefing.
And because plaintiffs concede the speech was cumulative in content as compared to the press conference, even if the trial court erred in considering the speech, such error was harmless. (Cal. Const., art. VI, § 13; Evid. Code, § 353, subd. (b).)
With their supplemental brief, plaintiffs sought judicial notice of a brief MWD filed on October 16, 1963, in Warne, supra, 60 Cal.2d 579. We do not normally take judicial notice of materials not presented at trial. (People v. Preslie (1977) 70 Cal.App.3d 486, 493 [138 Cal.Rptr. 828]; see Reserve Insurance, supra, 30 Cal.3d at p. 813.) Plaintiffs offer no persuasive reason to depart from the general rule in this case. (See Brosterhous v. State Bar (1995) 12 Cal.4th 315, 325-326 [48 Cal.Rptr.2d 87, 906 P.2d 1242].) Accordingly, we deny the request for judicial notice.
We note that DWR appears to believe it could maintain the 1967 50-year power rate forever, under its "discretion" to operate the SWP. Discretion is delimited by the legal standards applicable to its exercise, and public officials have no discretion to depart from such legal standards. (See Common Cause v. Board of Supervisors (1989) 49 Cal.3d 432, 443 [261 Cal.Rptr. 574, 777 P.2d 610]; City of Sacramento v. Drew (1989) 207 Cal.App.3d 1287, 1297-1298 [255 Cal.Rptr. 704].) DWR may not act arbitrarily when it values hydropower (see fn. 43, ante), and has no discretion to waste water resources (see Cal. Const., art. X, § 2). We have upheld DWR's view that it can "step into the shoes" of the utilities and credit the Delta Water Charge with the same amount the utilities paid, because of statutes explicitly allowing that practice. But on November 29, 2017, the Power Sale Contract would have expired, and Project Order No. 36 does expire. We decline to adjudicate in this appeal what DWR must do to determine an appropriate power rate after that date, because that issue was not directly raised or briefed by the parties, or addressed by the trial court.
