Lakes Water System Class Action

Litigation Update October 14, 2014

Sponsored by:

Green Valley Landowners Association

Topics we will discuss: The history of our Lakes Water System; The history of discrimination by the City of

Vallejo and the need for legal action; The factual and legal basis for our class action

complaint; The status of our litigation; Events occurring outside the litigation.

Overview

The Lakes Water System was constructed as Vallejo’s water supply, in the late 1800’s and early 1900’s.

It was one of the largest municipal water projects in the State of California at the time.

It consists of three reservoirs (Frey, Madigan and Curry), thousands of acres of watershed, a water treatment plant, and dozens of miles of oversized transmissions lines.

Recap: A Brief History of the LWS

Recap: A Brief History of the LWS

Water to Vallejo

Lakes Frey and

Madigan

Lake Curry

Green Valley

Gordon Valley

24” Gordon Line

14” Green Line

Over the years, Vallejo encouraged 810 county residents and several businesses, in Green Valley, Gordon Valley, Old Cordelia, Willotta Oaks, and Spurs Ranch to connect to the municipal system.

These rural, county customers were located in the immediate proximity of Vallejo’s oversized municipal transmission lines.

Recap: A Brief History of the LWS

For approximately 100 years, the LWS was used by both the City of Vallejo and the non-resident customers.

Vallejo, by virtue of its much larger municipal population and usage, paid approximately 98% of the costs. Our Complaint refers to this as the “Historic

Cost Sharing Ratio.”

Recap: A Brief History of the LWS

In 1992, Vallejo abandoned Lake Curry. Immediately thereafter, City Administrators unilaterally

informed the non-resident customers that it had developed other sources of water and therefore would no longer be paying any cost of the LWS.

Overnight, the number of connections financially supporting the cost of the entire municipal Lakes System dropped from over 30,000 to less than 800.

Rates for the rural customers immediately skyrocketed. Coincidentally, Vallejo residents rates went down!

Recap: A Brief History of the LWS

Recap: A Brief History of the LWS

Recap: A Brief History of the LWS

After 1992, the configuration of the LWS no longer made sense.

The system was radically changed from a transmission system to an ad hoc distribution system which has been described as an “octopus.”

Gordon Valley

Green Valley

Spurs Ranch

Willotta Oaks

Old Cordellia

The dramatic reconfiguration resulted in gross inefficiencies, for example: The 100 year old Gordon Line serves 64

households in Gordon Valley. The replacement cost for this deteriorated pipe: $7,392,000.

The 120 year old Green Line serves approximately 20 households in Spurs Ranch (American Canyon). The replacement cost for this pipe: $5,000,000.

Recap: A Brief History of the LWS

The condition of the water system the non-resident customers “inherited” was terrible. In 1992, 75% of the pipe infrastructure was

beyond its useful life. Today this same infrastructure is 30-50 years

beyond its useful life. The current replacement cost of the terribly

outdated pipe infrastructure is $24,000,000.

Recap: A Brief History of the LWS

Where are our numbers coming from? Almost all numbers we are relying on come

from the City of Vallejo. Most numbers and figures were taken from the

appraisal of the LWS conducted for Vallejo. We have, in some instances, projected figures

and predicted outcomes based on the numbers provided by Vallejo.

The numbers are real!

Recap: A Brief History of the LWS

The primary problem faced by the LWS customers is not a water problem.

The problem is an infrastructure problem. Even if the LWS customers could be served by a different

entity (e.g. Solano Irrigation District or Fairfield), just 810 households are still on the hook for $24,000,000+ in improvements.

The cost of water is not the problem; the problem is distributing the water to the customers.

Without legal action, this problem will not fix itself.

Recap: A Brief History of the LWS

Vallejo has discriminated against the Lakes Water

customers in several fundamental ways.

The Need for Action

First – Vallejo forced 810 non-residents to support the cost of operating a municipal water system. Our water comes from a municipal sized water

system, designed to support an entire city. Any large scale public works systems requires

a large population base to pay for the substantial costs of operation.

The Need for Action

Since 1992, LWS customers have been forced by Vallejo to pay all costs of operating a large-scale municipal water system, without the population to support it. Our costs are more than 10 times that of other

small water systems. The cost of just operating the LWS is about $3

million per year (or $3,000 per customer). This is the “as is” cost – without any

improvements. Our water bills only keep the system on

“life support”

The Need for Action

Second – Needed Capital Improvement Costs Far Exceed the Ability of the Customers to Pay. The customers were not informed of 90 years of

unaddressed, deferred costs. 75% of the pipes are now 30 years or more beyond

their useful life. The replacement cost is $24 million. Another $6 million will be due within 10 years.

The system also will require approximately $36 million to rebuild the earthen dams at our reservoirs.

These improvements should have been made during the time Vallejo used and paid for the system.

The Need for Action

Total infrastructure deferred cost: $30 – 66 million; plus finance costs!

Your share of the $30 to $66 million in costs: $37,000 - $82,000+, per household (not including finance costs).

This problem relates to the first problem – too few people paying for a system which is both too large and too outdated.

The Need for Action

What if Vallejo’s municipal population contributed to the $30-66 million in improvements (as they did for 100 years)? Total per/connection cost for all improvements:

$769 - $1,692. Per connection increase in average water bill if

improvements financed over 20 years: $6.40 - $14.10

Public works projects only “work” when there is a large enough base to support the costs!

The Need for Action

Third – Vallejo Plans to Sell the LWS to a Corporate Utility

Vallejo’s stated intent is to sell the LWS to a corporate utility.

The sale would not include any real property, the reservoirs or any water rights!

Vallejo wants between $9 million and $12 million for the 100+ year old pipes alone.

The Need for Action

This corporation would legally charge the customers for: The full purchase price paid for the system ($9

million+) Full cost of all operations ($3 million / year) Buying water on the open market! The cost of the needed improvements ($30-66

million) Plus profit of 15%.

Our Average Estimated bi-monthly bill if sold to a corporation: $1,150 per household.

The Need for Action

Problems with sale to corporate utility: We would still be on the hook for tens of

millions in deferred improvements, but: We would be charged for the acquisition price (much

of which we have already paid for); We would be charged for the cost of buying water on

the open market (a cost we do not currently have); We would be charged for more expensive finance

costs; We would be charged profit at upwards of 15%

on all of the above.

The Need for Action

It is against this background the GVLA acted.

On December 3, 2013, GVLA served notice on the City of Vallejo, to provide them an opportunity to respond. This was ignored.

On January 23, 2014, the GVLA filed a class action suit against the City of Vallejo.

The suit was brought by the GVLA as the legal representative of all LWS customers.

What Has Happened?

The decision to sue was not lightly taken. The GVLA was suddenly informed in August of 2013

that Vallejo had imminent plans to sell the Lakes System to a private, investor owned, corporate utility.

The decision to sue was made following two decades of best faith efforts by the GVLA to reach a more equitable system solution, including five years of fruitless negotiations regarding rate increases.

We faced the expiration of an agreement which preserved our rights to sue regarding the Lakes Water System 2009-2014 fee increases.

What Has Happened?

What is the Lawsuit Based On? This is Vallejo’s water system. It was designed

and used for 100 years to provide large quantities of water to Vallejo.

Service to the non-resident customers was always incidental to the primary purpose.

At the time each customer connected to the system, they did so with the expectation that Vallejo would continue to use and/or pay for the large costs of operating the LWS.

The Complaint

Why? Vallejo paid for 98% of the costs for 100 years.

No one expected Vallejo would depart from a course of dealing and performance spanning 100 years.

The configuration and size of the system was designed to meet the needs of Vallejo, not the LWS customers. No one expected the LWS would be radically

transformed into an ad hoc distribution system serving only the LWS customers.

The Complaint

Why? LWS customers were included because it was

convenient and financially lucrative to add them. No one expected the LWS customers – once

incidental to the system – would be the sole users.

There was never a large enough customer base within the LWS to support a municipal water system. No one expected 810 customers would be one

the hook to operate and improve a municipal water system.

The Complaint

What is the Lawsuit Based On? These expectations – based on 100 years of

conduct and dealings – formed an implied agreement that Vallejo would continue to pay for the vast majority of the costs of the LWS.

Vallejo first breached this implied agreement (and other legal duties) in 1992 when it dramatically departed from 100 years of conduct and dealing and transferred 100% of the cost to the non-resident customers.

The Complaint

What Does the Lawsuit Seek?

We want to be compensated for overpayments we made since 2009. Vallejo should have been paying 98% of the cost of the LWS.

We want an order requiring Vallejo to share in the future cost of operating the Lakes System as it did prior to 1992.

We want to stop a sale of all or any part the LWS. We want an accounting of the millions in Surcharge and

Connections fees paid to the City.

The Complaint

Vallejo filed a demurrer; an objection; to our suit.

Their response alleged that our suit fails to state a cause of action valid towards a municipality.

The Demurrer

Vallejo’s argument: It is a City, and as such, cannot be sued under any

cognizable legal theory. Because it is a city, Vallejo claims:

It cannot be sued for breach of an implied contract. It has no obligation to charge a reasonable rate for

water. It owes no legal or contractual duties to the customers. It cannot be enjoined (stopped) from selling the LWS. It is not obligated to provide an accounting of the

Surcharge or Connection Fees.

The Demurrer

Every judge in Solano County recused themselves from hearing the case.

The matter was reassigned to retired judge Arvid Johnson from Yolo County.

On August 21, 2014, after months of delays and postponements, Judge Johnson issued a ruling sustaining Vallejo’s demurrer without leave to amend.

In other words, he threw the case out without even giving the GVLA an opportunity to amend the complaint to address the Judge’s concerns.

The Demurrer

We believe Judge Johnson tailored his ruling to ensure the quickest and cleanest route for our case to be heard by the California 1st District Court of Appeal.

Judge Johnson “punted” by effectively asking the Court of Appeal to give him legal guidance on the issues raised in the complaint.

Why? The judge said the complaint was barred by Proposition 218, when

Vallejo all but admitted Prop. 218 does not apply. The judge said we had a statutory “remedy” in the event Vallejo sold

the system – an election to approve the sale where only Vallejo residents get to vote!

The judge said we could not sue to enforce Vallejo’s own ordinances which require it to use the Surcharge and Connection Fees to fund capital improvements.

The Appeal

On August 22, 2014, the day after the ruling, the GVLA filed our appeal in District Court .

The case is now in the Court of Appeals and we are awaiting a briefing schedule.

The Appeal

A three judge panel in the Court of Appeal will review Judge Johnson’s ruling “de novo” to determine whether the complaint states a cause of action.

In other words, the Court of Appeal will look at the issues of law using their own independent review.

The Appeal

While the GVLA would have preferred to have prevailed before Judge Johnson; his ruling does not represent a set back. Why? Vallejo publically stated it would have appealed if

they lost, and we would have been in the exact same position we are in now.

Vallejo’s “victory” is only temporary – just as a GVLA victory regarding the Demurrer, would have only been temporary.

We are confident the Court of Appeal will reverse Judge Johnson’s ruling.

The Appeal

Our lawsuit has already had positive effects: Vallejo has postponed its imminent plans to sell the Lakes

Water System to a corporation. This alone is a huge victory. Customers did not suffer a 53% rate hike in June, based on the

suspended sale of the system, saving over $1000/family this year alone, and projected to save over $2000 per family in 2015!

Vallejo has not increased our 5 year water rates, as it proposed. Any rate increase they propose is under more scrutiny than ever before.

The lawsuit has brought statewide attention to discrimination against non-resident customers.

Vallejo is finally, after over two decades, forced to formally address the concerns of the customers.

Immediate Effect of the Lawsuit

Our lawsuit has not stopped the continued mismanagement and

deterioration of the LWS.

What Has Occurred Outside the Lawsuit?

E-coli was detected in our drinking water prompting a required notification to the customers:

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What Has Occurred Outside the Lawsuit?

The 100+ year old pipes continue to break resulting in water outages and turbidity which have lasted for days. Green Line broke twice in the late spring resulting

in outages for days. Gordon Line broke twice this summer resulting in

outages for days. The customers and local fire departments only

learned about this when they discovered they had no water.

What Has Occurred Outside the Lawsuit?

As a result of one repair, Gordon Valley has been dependent upon a 6” “temporary” PVC pipe haphazardly laid on top of the ground to deliver its water:

What Has Occurred Outside the Lawsuit?

Water discharged and lost from Gordon Line break:

What Has Occurred Outside the Lawsuit?

The Court of Appeal will either affirm or reverse Judge Johnson’s ruling.

We cannot predict how long it will take for this ruling.

As we stated on filing, this is a long and slow process.

What is Next?

Last year we discussed the possibility of forming a Community Services District (CSD) to acquire the Lakes System.

The GVLA has discussed this with the Solano County Local Agency Formation (LAFCO) offices and were told we should wait until there is a contractual resolution to the lawsuit.

The GVLA continues to explore the possibility of forming a Lakes Water CSD as one of several possible solutions.

What is Next?

For additional information: www.gvla.com www.smflynn-law.com

Our original demand letter from December, 2013 Our critique of Vallejo’s appraisal of the LWS Our Class Action Lawsuit as originally filed Our opposition to Vallejo’s demurrer Our District Court briefs Our Appellate briefs (when filed)

Questions and Answers