Stockton Record
October 4, 2015

The agencies that work together to push water through Stockton taps have had, at times, an antagonistic relationship.

And that relationship has once more turned for the worse, with the water district that sells treated water to Stockton recently accusing its two biggest customers — the California Water Service Co. and the city of Stockton — of violating the terms of their contract.

The Stockton East Water District is increasing the pressure on those two “urban contractors,” threatening to file a lawsuit and even floating the very unlikely option of shutting off the flow of water to the city.

“This has just been going on so long,” said Jeanne Zolezzi, an attorney for Stockton East. “The board really doesn’t know what to do.”

The dispute concerns how Cal Water and the city split the bill for the water they buy from Stockton East each year. Stockton East argues that the method they use is inconsistent with the 1987 contract and has been flagged by auditors and bond rating agencies.

Indeed, Stockton East’s bond rating took a hit in 2013 at least in part because of concerns over how the bill is paid. The lower bond rating means it’s harder for Stockton East to float a new bond for projects — for example, long-promised fish passage improvements at the Bellota Weir east of Stockton. The lower rating also makes it more expensive for Stockton East, and therefore ratepayers, to refinance tens of millions of dollars in existing bond debt.

“Our bond rating is so bad, it’s going to cost more money,” said Paul Sanguinetti, a farmer and Stockton East board member. “They (the urban contractors) are not helping the situation. They want us to follow the contract to the letter, but it seems they don’t have to follow it to the letter.”

The dispute is complex. While some payments to Stockton East have come late, the issue is less about whether Stockton East gets paid and more about who pays the bulk of the bill. Stockton East contends that Cal Water and its customers are overpaying for water, while the city of Stockton and its customers are underpaying.

‘It was all good’

More than three years ago, Stockton built a $220 million drinking water treatment plant to take water from the Delta. The plant was intended to bring a much-needed additional source of water, taking pressure off the region’s over-tapped groundwater.

The new plant also reduced the city’s dependence on Stockton East, which provides water from the Calaveras and Stanislaus rivers in the east.

So the city and Cal Water entered into an agreement. The city would take less Stockton East water and pay less as a result. Cal Water would take more Stockton East water and pay more as a result.

For Cal Water, the deal made sense, said Stan Ferraro, a vice president with the San Jose-based company. Securing more water from Stockton East water, even at a higher cost, meant there was no need for Cal Water to build its own large water project to help it ease off of groundwater.

“For us, it was all good,” Ferraro said last week.

But Stockton East cried foul.

Shortly after the urban contractors reached their own deal in 2012, the water district began to protest that its contract with them did not allow them to pay based simply on how much water they received from Stockton East. Rather, the contract relied on a complicated formula taking into account all of the contractors’ water sources.

The contract was apparently written that way to discourage the city and Cal Water from acquiring water from other sources besides Stockton East. (The water district did not publicly oppose the Delta drinking-water plant, however.)
Who owes what?

Three years later, the disagreement remains unresolved. According to Stockton East, Cal Water each month pays more than it should under the contract, and the city of Stockton each month pays less than it should. This amounts, some privately suggest, to poorer Cal Water customers in central Stockton subsidizing somewhat more affluent neighborhoods mostly in the north.

Ferraro says Cal Water customers are getting their money’s worth because they’re getting more water. Stockton East fires back that under the contract, Cal Water should receive that additional water without paying an extra dime. Stockton East, in fact, is protesting a recent Cal Water rate increase filed with the state Public Utilities Commission.

All told, Stockton East says Cal Water has overpaid by $7.4 million and the city has underpaid by $8.1 million over the past three years. San Joaquin County, which buys a relatively tiny share of Stockton East water for unincorporated areas like Lincoln Village, has reportedly underpaid by more than $600,000. Stockton East also says it is currently owed more than $170,000 collectively.
Stockton water officials could not be reached late last week. Cal Water disputes that the payment method is in violation of the contract.
That contract allows the urban agencies to decide who gets how much water from Stockton East, Ferraro said. The district can appease its auditors by simply billing in that manner.

“What they keep crying to us about is that auditors are looking at this and questioning whether or not they’re actually going to get the money or not,” Ferraro said. “If they just invoice us based on our reallocation agreement, that wouldn’t be a problem… There’s nothing in there that prevents them from doing it.”
The parties have discussed renegotiating the contract itself. But that complicates matters because there are other aspects of the contract with which each side is unhappy. For example, the contract requires Stockton East to obtain approval from the urban agencies before building new water infrastructure. That is a difficult hurdle for the district, which wants to construct facilities to put river water into the ground and stabilize the aquifer. Groundwater levels beneath the urban areas have improved, but remain a serious problem in agricultural areas to the east.

“In some ways I’m sympathetic with Stockton East,” Ferraro said. “They’re the only district we deal with and that I’m aware of in the state that has a contract with the water providers that requires them to get our approval for capital projects that will affect us. Government agencies don’t like anybody telling them what to do.”
‘Tell us what’s going on’
Something must be done, Zolezzi said. The problem goes beyond who cuts the check. Payments have been late and inconsistent, she said.

“Our auditors are telling us every year, ‘You can’t continue to do this. You can’t balance the books,’” she said. “Somebody’s got to tell us what’s going on.”

Stockton East and the city, in particular, have feuded in the past. In the early 2000s the city argued that money from urban water users was cushioning Linden-area farmers who also rely on deliveries from Stockton East. In 2002, former Mayor Gary Podesto made a bid for the city to take over Stockton East’s treatment plant, allowing the city to seize “control of its own destiny.” It never happened.