LOS ANGELES - A California state appeals court ruling gave both sides victory claims in litigation between the Metropolitan Water District of Southern California and the largest of its 26 member agencies.

Diamond Valley Lake, a drinking water storage reservoir in Hemet, Calif. managed by the Metropolitan Water District of Southern California.
The Metropolitan Water District of Southern California's Diamond Valley Lake. Bloomberg

The First District Court of Appeal last week affirmed the legality of the aspect of Metropolitan's rate-setting methodology that includes State Water Project costs, reversing a 2015 trial court decision that had awarded $188.3 million in breach of contract claims to the San Diego County Water Authority.

The SDCWA pays water transportation rates to Metropolitan for the movement of imported water the San Diego authority purchases from the Imperial Irrigation District. Metropolitan's transportation rate-setting methodology includes SWP charges associated with moving water from northern California to southern California, which the SDCWA contested, saying it resulted in overcharges.

While the court ruled in Metropolitan’s favor on the core question, it handed several wins to the San Diego agency by agreeing in some of its complaints about the methodology, affirming its view of its rights to preferential water during a shortage, and finding that SDCWA has standing to challenge an unconstitutional component of Metropolitan's water conservation program contracts that allowed Metropolitan to cut off conservation program funding to the authority.

Fitch Ratings said it sees the court’s decision as credit-neutral for both issuers.

“Fitch believes the current credit ratings of Metropolitan and CWA provide sufficient room to incorporate any potential outcomes in the case pending ultimate resolution,” the rating agency said.

The case is expected to be appealed to the Supreme Court of California.

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