Plugging a Leak in the System 

Are water companies like EBMUD overcharging government customers? As the courts conclude they are, the utilities lobby for protection.

Six years ago, the University of California sued the East Bay Municipal Utility District for allegedly overcharging its Berkeley campus for water service. University officials were convinced that the district had systematically tacked phony charges onto its water bills for the past ten years, and they wanted the money back. The two parties finally reached an agreement two years ago, but the matter didn't go away when the university quietly pocketed a $2 million legal settlement. The settlement only covered three of the ten years, and now the parties are back in court wrangling over the other seven and how such bills will be handled in the future.

Meanwhile, across the bay, a similar case between the University of California and the San Francisco Public Utilities Commission is making its way through the courts. And down in Southern California, a host of government agencies are suing their water company, the Los Angeles Department of Water and Power, alleging that it also wildly overcharged its public customers by $300 million since 1990. Convinced of the merit of these allegations, the state attorney general's office has joined the suit on their behalf.

The cases are not going well for the utilities. Concerned about their likely liability, the water companies lobbied state Democratic Assemblywoman Jackie Goldberg of Los Angeles and convinced her to introduce legislation that could derail the pending lawsuits. Goldberg's bill passed the Assembly on a 67-0 vote, and now is making its way to a Senate committee for further consideration.

Although there is wide disagreement about whether the bill would affect the ongoing lawsuits, the parties suing the water companies say Goldberg's bill would deliver a devastating blow to their cases. Eric Havian, a San Francisco attorney suing the Los Angeles Department of Water and Power alongside the attorney general's office, says Goldberg's bill would let the utilities beat the lawsuits and rewrite the law so they can charge their governmental customers whatever capital costs they want. "Obviously, the reason the utilities need this bill is because existing law shows they were overcharging their customers," Havian says. "They need the bill to change the rules so they can successfully avoid these lawsuits. It's like playing a game of baseball and then you lose the game and then you have the umpire rewrite the rules so that you win."

The dispute comes as the state is struggling with a massive budget deficit that threatens to take hundreds of millions of dollars away from California's counties, public schools, and other public agencies. At the University of California, officials estimate that Goldberg's bill would cost the system $5 million a year in utility overcharges if it were to become law. "I cannot understand why anyone would want to give utility districts a blank check on the backs of schools and other government agencies," says Vince Stewart, a legislative analyst with the University of California. "This is just a power grab to get more money out of state agencies and schools, which are very strapped for cash. You add in what community colleges will pay, K-12 schools, state government agencies, and it's a lot of money. This is, by no means, a small issue for us."

On paper, the dispute might seem bureaucratic and highly technical. But to the people suing the utilities it represents a troubling question: Can one public agency rip off another with impunity?

Under existing state law, water companies must secure the approval of the California Public Utilities Commission to raise the rates of their residential or commercial customers. But government agencies are a special case. Publicly owned water companies are allowed to automatically pass along to governmental customers the costs of capital improvement and construction charges. For instance, if UC Berkeley used 10 percent of EBMUD's water, the utility could charge the university 10 percent of its associated costs.

But critics such as Stewart and Havian say utilities such as EBMUD and its San Francisco counterpart have been charging far more than they are entitled to under the law. The two sides also disagree about whether these fees may include the cost of maintaining existing equipment, among other things.

EBMUD General Counsel Bob Helwick insists that his agency doesn't overcharge its government customers. Officials such as Helwick say the legislation is merely needed to close a confusing area of state law that is costing taxpayers millions in legal disputes. "There is a desperate need to clarify this," he says. "There are lots of provisions which are unclear and difficult to apply."

Goldberg spokesman Bill Reid agrees that the bill simply clarifies existing law and would have no impact on the pending litigation. But Goldberg's own literature suggests that the utilities face legal trouble without the bill. In a public "background document" on the legislation, in a section titled "What happens if this legislation fails?" the text reads, "Numerous utilities will most likely lose the lawsuits they are facing."

Reid acknowledged that the document in question was written by the utilities pushing for the legislation. He stumbles when asked to explain the sentence: "There needs to be a cleaning up of the fact sheet. ... I don't think that point is germane anymore." Pressed further, he adds, "What the court does themselves is completely out of our hands. Some people might say if this law passes, it might have an effect in court."

Attorney General Bill Lockyer is one such person. "We're working with Assemblywoman Goldberg to try and get an amendment that specifies the law would be prospective," Lockyer spokesman Tom Dresslar says. "We want to make sure the bill does not affect the pending lawsuits."

Lockyer's entry into the fray is not the utilities' only cause for worry. A recent court ruling in the University of California's case against San Francisco's water company concluded that the district's capital fee charges to the school were "illegal" and inconsistent with state law. That case continues to make its way through superior court.

Goldberg's decision to carry the bill is an odd one. A progressive who portrays herself as someone dedicated to representing the disenfranchised, her bill could take hundreds of millions of dollars from government agencies in her own, primarily low-income, legislative district. She also once served on the Los Angeles Unified School District board -- one of the very plaintiffs suing the Department of Water and Power for $138.5 million in alleged overcharges since 1990.

Numerous school districts and other government agencies have joined together to formally oppose Goldberg's bills. While school districts and counties are suffering enormous financial setbacks, public utilities are awash in cash. A recent state study of California's special government districts, which includes the public utilities, found they had $20 billion in cash reserves.

At the cash-strapped Oakland School District, which recently secured a $100 million loan from the state legislature and is now being supervised by a state-mandated overseer, officials knew nothing about the utility overcharge dispute and its potential for helping their own bottom line. "We hadn't know about the issue and are appreciative of the heads up," district spokesman Ken Epstein says. "Public schools, and in particular Oakland, needs every cent it can get and shouldn't be subsidizing utilities."

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