IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA THIRD APPELLATE DISTRICT (Sacramento)
February 15, 2013
ALAMEDA COUNTY FLOOD CONTROL, ETC. ET AL., PLAINTIFFS AND APPELLANTS,
DEPARTMENT OF WATER RESOURCES, DEFENDANT AND RESPONDENT, ANTELOPE VALLEY-EAST KERN WATER AGENCY ET AL., DEFENDANTS, INTERVENERS AND APPELLANTS.
APPEAL from a judgment of the Superior Court of Sacramento County, Patricia C. Esgro, Judge. (Super. Ct. Nos. 05AS01775 & 07AS04901)
The opinion of the court was delivered by: Duarte , J.
CERTIFIED FOR PUBLICATION
Pillsbury Winthrop Shaw Pittman LLP, John S. Poulos, Amy L. Pierce, Darcy L. Muilenburg; Lewis Brisbois Bisgaard & Smith LLP, Greg L. Johnson; Kronick Moskovitz Tiedemann & Girard and Edward J. Tiedemann, for Plaintiffs and Appellants Alameda County Flood Control & Water Conservation District Zone 7, Alameda County Water District, City of Yuba City, County of Butte, County of Kings, Empire West Side Irrigation District, Kern County Water Agency, Napa County Flood Control & Water Conservation District, Oak Flat Water District, Plumas County Flood Control & Water Conservation District, Santa Clara Valley Water District, Solano County Water Agency, and Tulare Lake Basin Water Storage District.
Amelia T. Minaberrigarai, for Plaintiff and Appellant Kern County Water Agency.
Kamala D. Harris, Attorney General of California, Denise Ferkich Hoffman, Supervising Deputy Attorney General, Matthew J. Goldman and Vera Sandronsky, Deputy Attorneys General, for Defendant and Respondent, State of California, Department of Water Resources.
Bingham McCutchen LLP, James J. Dragna, Colin C. West and Thomas S. Hixson, for Defendants, Interveners and Appellants 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, Littlerock Creek Irrigation District, Metropolitan Water District of Southern California, Mojave Water Agency, Palmdale Water District, San Bernardino Valley Municipal Water District, San Gabriel Valley Municipal Water District, San Gorgonio Pass Water Agency, and United Water Conservation District.
Best Best & Krieger LLP and Robert M. Sawyer, for Defendant, Intervenor and Appellant, Ventura County Watershed Protection District.
Marcia L. Scully, John Schlotterbeck, Heather C. Beatty and Karen L. Tachiki for Defendant, Intervenor and Appellant, The Metropolitan Water District of Southern California.
"As Mark Twain is said to have observed: 'Whiskey is for drinking; water is for fighting over.'" (County of Imperial v. Superior Court (2007) 152 Cal.App.4th 13, 18 (Imperial).) As lamented nearly 50 years ago, California's water is still maldistributed relative to supply and demand, and "California's North-South war still smoulders and is far from being resolved." (1 Rogers & Nichols, Water for California (Bancroft-Whitney 1967) California Water Plan, § 87, pp. 115-116 (Rogers & Nichols).)
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.
We agree with the trial court's ultimate interpretive resolutions, but do not entirely accept the trial court's reasoning. We hold the contract is not ambiguous on the subject of market rates, because its language--when read in light of governing law--is not reasonably susceptible of a reading that requires application of current market rates. In 1967, DWR signed a 50-year "Power Sale Contract," agreeing to sell power--evidently at then-current market rates--to several utilities. Later, DWR took over that Power Sale Contract, in effect paying itself what the utilities had been paying to DWR. DWR was statutorily authorized to continue making to itself the payments that the utilities had previously made. The relevant statutes permitted DWR to do what it has been doing.
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 resolved against plaintiffs by the practical construction rule, given a 20-year period of performance without challenge to DWR's administration of the contract.
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 United States, 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; see In re Bay-Delta etc. (2008) 43 Cal.4th 1143, 1153-1155 (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 (PCL); see Wat. Code, §§ 12931, 12934, subd. (d), 12935.)*fn1
"The SWP serves the domestic water needs of approximately two-thirds of all Californians, with the [Metropolitan Water District of Southern California (MWD)] receiving about half of the SWP's water delivery. [Citations.] Due to environmental concerns, however, construction of the entire SWP project has never been completed, resulting in the annual delivery of only about half of the 4.2 million acre-feet of water projected." (Bay-Delta, supra, 43 Cal.4th at p. 1155.)
The parties on appeal--apart from DWR--are SWP contractors, assignees or successor entities.*fn2
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.*fn3 The "cost of project water" was not defined.
The statutes authorizing the SWP, popularly referred to as the Burns-Porter Act, were submitted to and passed by the voters at the November 8, 1960, General Election, as Proposition 1.*fn4 "After the contracting principles were published, but before the Act was approved by the voters, [DWR] entered into its first local water supply contract pursuant to the Act with MWD. The contract was negotiated on the basis of the contracting principles, and was contingent on the Act's later approval. Negotiations were of statewide significance because it was generally recognized that the contract would be the prototype for all later Project contracts, for article 45 of the MWD contract required that the basic terms and conditions of all later contracts be substantially uniform." (Goodman v. County of Riverside (1983) 140 Cal.App.3d 900, 905 (Goodman).)
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.*fn5 Thus, credits to the Delta Water Charge benefit all contractors, but credits to the Transportation Charge benefit contractors as they receive water, and the farther their water travels, the more they benefit.
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 (Marquardt).)*fn6
Annually, the SWP consumes more power than it generates. But its power plants can operate at all hours, allowing DWR to exploit the variable price of electricity: DWR can run water pumping plants at "off-peak" times (generally at night and on weekends), when the cost of electricity is lower, and sell or trade on the open market power it produces at "on-peak" times, when the value of electricity is higher, netting a profit to reduce SWP's costs.
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 as finally agreed 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."*fn7
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 contacts, and the pledge of proceeds are part of the single and indivisible scheme the voters accepted. The largest contract, the [MWD] contract, was signed four days prior to the voter approval of the Burns-Porter Act, and the California Supreme Court has held that the voters were aware of the contract when they approved the Burns-Porter Act. . . . In sum, the voters did not simply approve the $1.75 billion bond indebtedness; they also approved a contractual scheme to support the system and pay the indebtedness." (61 Ops.Cal.Atty.Gen. 373, 379 (1978), emphasis added.)
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 power plants 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.*fn8
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.*fn9 Of that annual payment, $14.65 million was applied to principal and interest on the construction revenue bonds, and the remaining $1.5 million was a fixed amount applied to OMP&R costs. However, those costs eventually exceeded $1.5 million. The trial court found DWR "treated the $16.15 million a year received under the Power Sale Contract as the 'total revenues' generated by Hyatt-Thermalito under Article 22 in calculating the Delta Water Charge thereunder. There was no evidence of any objection to this interpretation . . . ."
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 canceling 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.
"A key issue addressed in the committee meetings and related correspondence was how to value Hyatt-Thermalito power for purposes of crediting the Delta Water Charge. . . . As to the value of Hyatt-Thermalito power, DWR enumerated four potential alternatives:
"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 (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 further north and therefore have lower power costs for the water delivered to them.*fn10
As the trial court found:
"Thus Alternative D would benefit contractors with relatively low pumping costs, since it would substantially lower the Delta Water Charge which would receive a credit based upon the full market value of the power generated and consumed in the SWP. Alternative D would at the same time disadvantage contractors with high pumping costs, since a market value credit to the Delta Water Charge would mean that those contractors would pay market value for Hyatt-Thermalito power through the Transportation Charge thereby dramatically increasing the cost of water to them.
"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 cash flow 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 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.
After a lengthy court trial and extensive briefing, the trial court issued a statement of decision finding against plaintiffs on the issue of contract interpretation. The trial court concluded the phrase "total revenues" in article 22(a) was ambiguous as to whether it meant market rates whether the power was used by DWR or resold for a profit, but concluded that the long course of dealings between the parties showed the contract did not require valuing power at market rates in either case.
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 Market Rate Claim
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 I-A, we shall explain in Part I-B 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 I-C, we reject claims based on a contractual provision applicable to large landholders. In Part I-D, we reject claims based on dictionary definitions. In Part I-E, we reject claims based on extrinsic documents. In Part I-F, we summarize our conclusions.
A. General Rules of Ambiguity
We have said that "indeterminancy in the application of language signals its vagueness or ambiguity. An ambiguity arises when language is reasonably susceptible of more than one application to material facts. There cannot be an ambiguity per se, i.e. an ambiguity unrelated to an application." (California State Auto. Assn. Inter-Ins. Bureau v. Superior Court (1986) 177 Cal.App.3d 855, 859, fn. 1, emphasis added.)
Thus, an ambiguity cannot be created by parsing words outside their context. (See Foster-Gardner, Inc. v. National Union Fire Ins. Co. (1998) 18 Cal.4th 857, 868.) "'[L]anguage in a contract must be construed in the context of that instrument as a whole, and in the circumstances of that case, and cannot be found to be ambiguous in the abstract.'" (Bay Cities Paving & Grading, Inc. v. Lawyers' Mutual Ins. Co. (1993) 5 Cal.4th 854, 867 (Bay Cities).) "Multiple or broad meanings do not necessarily create ambiguity. . . . [¶] The proper question is whether the word is ambiguous in the . . . circumstances of this case." (Bay Cities, supra, 5 Cal.4th at p. 868.) Nor does the fact that language could be clearer make it ambiguous. (See Banning Ranch Conservancy v. Superior Court (2011) 193 Cal.App.4th 903, 914; Suarez v. Life Ins. Co. of North America (1988) 206 Cal.App.3d 1396, 1406.) Instead:
"To say that language is ambiguous is to say there is more than one semantically permissible candidate for application, though it cannot be determined from the language which is meant. Every substantial claim of ambiguity must tender a candidate reading of the language which is of aid to the claimant. One must ask what meanings are proffered and examine their plausibility in light of the language. A party attacking a meaning succeeds only if the attacker can propose an alternative, plausible, candidate of meaning." (Estate of Dye (2001) 92 Cal.App.4th 966, 976 (Dye).)
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 (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 . . ."].)
"An ambiguity can be patent, arising from the face of the writing, or latent, based on extrinsic evidence." (Solis v. Kirkwood Resort Co. (2001) 94 Cal.App.4th 354, 360-361.) "A claim of latent ambiguity requires a provisional examination of extrinsic matters to make the judgment whether the claim is tenable." (City of Sacramento v. Public Employees' Retirement System (1994) 22 Cal.App.4th 786, 795; see Winet v. Price (1992) 4 Cal.App.4th 1159, 1165-1166 (Winet).)
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.)
B. The Contractual Language and Governing Law
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 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."
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.*fn11
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.
Further, "As a general rule, 'all applicable laws in existence when an agreement is made, which laws the parties are presumed to know and to have had in mind, necessarily enter into the contract and form a part of it, without any stipulation to that effect, as if they were expressly referred to and incorporated.'" (Swenson v. File (1970) 3 Cal.3d 389, 393; see 11 Williston on Contracts (4th ed. 2012) Interpretation and Construction § 30:19, p. 247 [applied to public contracts].)
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 provided:
"Under such regulations and upon such terms, limitations, and conditions as it prescribes, [DWR] may do any of the following:
"(a) Fix and establish the prices, rates, and charges at which the resources and facilities made available by the project shall be sold and disposed of.
"(b) 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; Stats. 1957, ch. 1932, § 293, p. 3410.)*fn12
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.
Further, the statutes authorizing cancellation of the Power Sale Contract required DWR to find that "notwithstanding the cancellation, it will 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.) By statute, DWR had to pay for the power "at a rate or price at least equal to that specified in the contract or lease to be canceled and for a period at least equal to the unexpired portion of the term of such contract or lease." (§ 11670.) These statutes predated the contract (Stats. 1957, ch. 1932, §§ 336-337, p. 3417); consequently, they were part of the contract.
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.*fn13
Thus, the contract, read in light of governing statutes explicitly incorporated therein, gave DWR the discretion to pay at least the same amount for power that the utilities were paying, and did not require it to pay market rates.
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,[fn.] 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, emphasis added.) 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 p. 196, fn. 17.)*fn14 Accordingly, read in context, Marquardt rejected the contention that DWR has no discretion pursuant to article 22.
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.
C. Article 30
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.
The acreage definition we referenced at footnote 3, ante, levied a "surcharge" on large landholders as described in article 30(a), consisting of "an amount equivalent to the power credit per acre-foot of water" used on so-called "excess" land. Under article 30(b), "the term 'power credit' shall mean the net value accruing to the State from revenues derived from the sale or other disposal of electrical energy generated . . . after deducting from said revenues the amount necessary to repay the investment properly chargeable to energy generation and for operation, maintenance, and replacement of the electrical generation facilities." (Emphasis added.) A fixed $2 per acre-foot surcharge applied until the power plants were operational; thereafter, it was recomputed annually pursuant to a given formula.
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 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.*fn15 (Marquardt, supra, 59 Cal.2d at pp. 186-188.) In discussing that issue, Marquardt observed:
"The state provides the project water at cost but sells project power at market value and uses the power revenues to reduce the cost of water, thus granting water users a subsidy. The surcharge is calculated on the basis of the power profits used to subsidize water users and has the effect of limiting the amount of the subsidy received by persons who have large land holdings, a circumstance which tends to indicate that they are less in need of subsidy." (Marquardt, supra, 59 Cal.2d at p. 186, emphasis added.)
Plaintiffs rely on the Supreme Court's reference to selling power at market value. But the Supreme Court was describing how the contract worked generally, and did not purport to explicate article 22(a)'s meaning as pertinent to this case. "A decision is not even authority except upon the point actually passed upon by the Court and directly involved in the case." (Hart v. Burnett (1860) 15 Cal. 530, 598; see Paterno v. State of California (1999) 74 Cal.App.4th 68, 88 (Paterno).) And because Marquardt was decided in 1963, before the 1967 Power Sale Contract, at best for plaintiffs it reflected what DWR hoped to receive, not what its "total revenues" actually would be.*fn16
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 I-E-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 of 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." (Emphasis added.) Thus, the summary, taken as a whole, accurately reflected the difference between "revenues" and "net value" articulated by the contract.
Further, the very fact the parties used "net value" in one part of the contract (article 30(b)) and "total revenues derived" in another (article 22(a)) shows the two sections reference different concepts. As a general rule of statutory interpretation, "'Where the same word or phrase might have been used in the same connection in different portions of a statute but a different word or phrase having different meaning is used instead, the construction employing that different meaning is to be favored.'" (People v. Stewart (2004) 119 Cal.App.4th 163, 171.) We apply this rule to the contract in this case, which by virtue of the manner of its confirmation by the People and the Legislature is akin to a statute. (See 61 Ops.Cal.Atty.Gen. 373, 379 (1978).) Further, a similar rule obtains in contract cases: "[I]t must be held, in the absence of any expression in the contract to the contrary, that words which are not synonymous were never intended to be so used." (Cordes v. Harding (1915) 27 Cal.App. 474, 480; see 14A Cal.Jur.3d (2008) Contracts, § 222, p. 54.)
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 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.*fn17 In any event, we see nothing in article 30(b)'s use of the term "net value" that raises any ambiguity in article 22(a)'s use of the term "total revenues derived[.]"*fn18
D. Dictionary Definitions
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. See, e.g., Black's Law Dictionary 1433 (9th ed. 2009) ('revenue' means '[g]ross income or receipts'); Black's Law Dictionary 703 (6th ed. 1990) ('gross receipts' means '[t]he total amount of money or the value of other considerations received') (emphasis added). 'Revenue' is '[t]hat which returns, or comes back, from an investment; the annual or periodical rents, profits, interest, or issues of any species of property, real or personal . . . .' Webster's Unabridged New International Dictionary of the English Language (2d ed. 1934) (emphasis added); see also Compact Edition of the Oxford English Dictionary 597 (1985) ('revenue' is '[t]hat which comes in to one as a return from property or possessions . . .')."
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 "the total amount of money or the value of other" consideration received. (Black's Law Dict. (6th ed. 1990) p. 703, emphasis 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. (9th ed. 2009) p. 772; see also 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 Enters. v. Bureau of Revenue (Ct.App. 1974) 86 N.M. 799 [528 P.2d 212, 213]; Michie's Ann. Stat. N.M. § 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).)
Finally, relevant definitions would be from sources predating the contract. (See Kouichi Taniguchi v. Kan Pacific Saipan, Ltd. (2012) 566 U.S. ___, ___ [182 L.Ed.2d 903, 912-913; 132 S.Ct. 1997, 2002-2003].) Such definitions refute plaintiff's contention. (See Ballentine's Law Dict. (2d ed. 1948) p. 1139 ["Revenue or income is what is produced by capital" and equates to "Income or annual profit received" or "that which returns, or comes back from an investment"]; 2 New Century Dict. (2d ed. 1936) p. 1546 ["return or yield from any kind of property"].) And before the contracts were signed, a California appellate court treated "income" as synonymous with, inter alia, "'revenue'" and rejected a claim that "income" from realty should include the reasonable rental value not actually received. (Wells v. Wells (1944) 64 Cal.App.2d 113, 115-116.)
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.*fn19
E. Extrinsic Documents
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.
In determining whether language is ambiguous it is essential to tether extrinsic evidence to particular language: "'The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible.'" (Dore v. Arnold Worldwide, Inc. (2006) 39 Cal.4th 384, 391 (Dore), emphasis added.) Therefore, if "the language of the instrument" cannot carry the meaning ascribed to it by the party claiming an ambiguity, "'the case is over.'" (Dore, supra, 39 Cal.4th at p. 393.)
We find the following quotation to be apt:
"California finds meaning in contractual language in its applications. To avoid future disputes and to provide predictability and stability to transactions,
courts attempt to interpret the parties' intentions from the writing alone, if possible. [Citations.] This is particularly true with documents relating to real estate transactions, which, when recorded, are intended to provide public notice and promote public reliance on their facial meaning.
"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, 356-357 (Abers), emphasis added.)
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. 373, 379 (1978).) 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.)
It is well settled that extrinsic evidence cannot be used to add a provision to the contract that was omitted by the parties. (See Pacific Gas & Electric Co. v. G. W. Thomas Drayage & Rigging Co. (1968) 69 Cal.2d 33, 39; Bernard v. State Farm Mutual Automobile Ins. Co. (2007) 158 Cal.App.4th 304, 309; A.B.C. Distributing Co. v. Distillers Distributing Corp. (1957) 154 Cal.App.2d 175, 185 ["Matters which were intentionally omitted from a contract may not be added under the guise of interpretation"].)
An explicit "market rate" provision was proposed but dropped, and it cannot be restored via extrinsic evidence untethered to contractual language.*fn20
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.*fn21
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.
1. The Contracting Principles
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."*fn22
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, emphases 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 supposed to pay for all SWP expenses. (Goodman, supra, 140 Cal.App.3d at p. 908; see Patton v. City of Alameda (1985) 40 Cal.3d 41, 45 [discussing Goodman].) That particular portion of the contracting principles (Principle No. 3) was fully implemented, and it bears more detailed discussion.
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; see also Peery v. City of Los Angeles (1922) 187 Cal. 753, 767.) 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; 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 Leg. 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, it will pay for itself." (Ballot Pamp., supra, argument in favor of Prop. 1, p. 3; see 61 Ops.Cal.Atty.Gen. 373, 380-381 (1978) [voters told it would be "an essentially closed, self-supporting system"].) The opponents did not address the sale of power.*fn23
Thus, despite the contracting principles, the voters were not led to believe "market rates" for power would be charged. They were told that the project would pay for itself through the sale of water and power, which would be sufficient to repay the bondholders. They were also told DWR would have the authority to enter into contracts subject to legislative conditions. As required by law, the full text of the Burns-Porter Act was included in the Ballot Pamphlet,*fn24 including section 12931, which provided that facilities built by the act would be operated pursuant to the CVP act. (§ 12931; see Ballot Pamp., supra, text of Prop. 1, p. 22.) When Proposition 1 was presented to the voters, the CVP Act already vested DWR with the authority to set power rates and cancel and take over contracts for the sale of water and power. (§§ 11454, subd. (a), 11455, 11670, 11671; see Stats. 1957, ch. 1932, §§ 293-294, 336-337, pp. 3410, 3417.) Thus, the voters understood they were not compelling the charging of market rates for power, as such a conclusion is inconsistent with the text, analysis, and official arguments presented to them, despite their presumed knowledge of the contracting principles.*fn25
In short, the contracting principles do not override the language of the contracts or applicable statutes, and do not render the contract ambiguous as plaintiffs posit.*fn26
2. Legislative Reports
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 on the contracting parties, nor indicative of their intent."*fn27 Interveners correctly contend that what is important is that the Legislature had the power to change the contracts during the 1961 Regular Session, but did not. (See Marquardt, supra, 59 Cal.2d at pp. 181-182.)
Plaintiffs also contend legislative committees "were keenly aware of" section 11626, which gave preference to state agencies in awarding CVP contracts. Section 11625 provides that any entity may contract with DWR to buy or use water, power, or other project assets, but section 11626 provides: "In entering into and awarding contracts, in case of equal or equivalent offers . . . [DWR] shall grant preference to state agencies or other organizations not organized or doing business for profit but primarily for the purpose of supplying water or electric power to their own citizens or members." A Legislative Counsel opinion dated September 30, 1958, observes that section 11626 grants preferences only to public offers "which are equal or equivalent to offers made by private companies, or corporations organized for profit." It also observes that DWR may determine what is an equal or equivalent offer.
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.*fn28
3. Public Statements
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 deem their contention forfeited. (See Loranger, supra, 184 Cal.App.4th at p. 858, fn. 9; Utz v. Aureguy (1952) 109 Cal.App.2d 803, 807-808 (Utz).)*fn29
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.*fn30
4. Conclusion as to Extrinsic Documents
We see nothing in the contracting principles, legislative reports, and public statements made before the MWD contract was agreed upon, that signals the meaning of "total revenues derived" can plausibly mean "market value." Although extrinsic evidence may be used to show a latent meaning, that meaning must reside in the document. (See Dore, supra, 39 Cal.4th at p. 391; Abers, supra, 189 Cal.App.4th at pp. 356-357.) Plaintiffs' extrinsic evidence does not show any ambiguity in the contract.*fn31
F. Conclusion as to Market Rates
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).
"Resales" of Oroville Power
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 reduces the Delta Water Charge under article 22(a). We requested supplemental briefing to clarify the positions of the parties on this question.*fn32
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 system-wide "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.*fn33
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.*fn34
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 "total Project resources as a whole" and anticipated Oroville power would be "melded with other existing and future project power resources." It is also reflected by Orrick, Herrington & Sutcliffe's bond opinions in 1977 and 1982, which DWR interprets to support its position, reasoning generally as follows:
There are two types of bonds at issue, revenue bonds under the CVP Act and general obligation bonds under the Burns-Porter Act. The Oroville power plants were built with two tranches of CVP revenue bonds, retired in 1994. Thus, as DWR explains, there are no longer any bonds directly secured by the revenue from Oroville power. However, the State's "General Fund" is reimbursed "by revenue derived from the facilities financed by the general obligation bonds." (See §§ 12936, 12937, subd. (a).) The Oroville power plants were by statute treated as "separate and apart" from the CVP, and the revenue from the bonds to construct them was kept separate from the revenue from general obligation bonds used to fund other parts of the SWP. (§ 11260; see Warne, supra, 60 Cal.2d at pp. 581-586, 588, 592-593.) When money used by DWR to buy Oroville power pursuant to the State Power Contract (now Project Order No. 36) is transferred from the "California Water Resources Development [i.e., general obligation] Bond Fund" (see § 12937, subd. (b)) into the segregated "Central Valley Water Project Revenue Fund" (see §§ 11815, 11818), that money is revenue from the sale of Oroville power and, as provided by article 22(a), is credited against the Delta Water Charge. Money from the sale of SWP system pool power--some of which may have come from Oroville--must be kept in the general obligation bond fund, and cannot be credited against the Delta Water Charge. As stated by our Supreme Court, "revenues from facilities constructed with [Burns-Porter Act funds have] no application to revenues from facilities financed under the Central Valley Project Act." (Warne, supra, 60 Cal.2d at p. 585; see § 12937, subd. (b).) In short, as correctly stated by outside bond counsel, "Having thus changed the character of the power . . . so that it is no longer Oroville Power [but has joined the SWP system power pool], moneys received by [DWR] from the subsequent sale of that power" are not "revenue" under article 22(a).
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 service, or any part thereof, and pay for it at a rate or price at least equal to that specified in the contract or lease to be canceled and for a period at least equal to the unexpired portion of the term of such contract or lease." (Emphases added.)
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, emphasis 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.*fn35
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 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 additional revenue therefrom. They contend DWR's relationship with bondholders is irrelevant to DWR's contractual relationship with them.*fn36 Further, as suggested by a question we posed to the parties, they emphasize that unlike DWR, the utilities who were parties to the 1967 Power Sale Contract owed no contractual duties toward plaintiffs. (See fn. 13, ante.) In short, plaintiffs view the system power pool concept, while perhaps convenient for DWR's internal purposes, as irrelevant to them. They argue that, to the extent it deprives them of the full benefit of Oroville revenues, it is a "shell game" that results in "a massive, extra-contractual shift of the benefit of power generated by the [Oroville] facilities . . . to heavy users of transportation[.]" In short, plaintiffs contend DWR made a pile of money by taking over the Power Sale Contract, and uses it to lower the cost of providing water to Southern California.
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.*fn37
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 rely on one 1994 protest letter. This was one of what the trial court described as "typically collective letters" sent to DWR by a group of contractors that included some plaintiffs and some interveners. One protest reads: "6. Project energy costs and related activities as follows: [¶] a. All costs insofar as such costs are affected by project purpose allocations." This does not describe the resale issue, and there is no reason why a collective letter would raise an issue about which the collective's constituent members had directly opposed financial interests. Further, the author of the letter, a former KCWA General Manager, conceded he had "[n]ot specifically" thought of the present dispute when that letter was drafted, and there was other evidence to that effect. Accordingly, the trial court's finding that no claim was made that DWRbreached the contract until 2003 stands factually unrebutted.*fn38
Legally, the trial court found this long course of dealings triggers the "practical construction" rule, generally providing: "When one party performs under the contract and the other party accepts his performance without objection it is assumed that this was the performance contemplated by the agreement." (Bohman v. Berg (1960) 54 Cal.2d 787, 795 (Bohman).) The rule has been explained in more detail as follows:
"It is to be assumed that parties to a contract best know what was meant by its terms, and are the least liable to be mistaken as to its intention; that each party is alert to his own interests, and to insistence on his rights, and that whatever is done by the parties contemporaneously with the execution of the contract is done under its terms as they understood and intended it should be. Parties are far less liable to have been mistaken as to the intention of their contract during the period while harmonious and practical construction reflects that intention, than they are when subsequent differences have impelled them to resort to law, and one of them then seeks a construction at variance with the practical construction they have placed upon it. The law, however, recognizes the practical construction of a contract as the best evidence of what was intended by its provisions." (Mitau v. Roddan (1906) 149 Cal. 1, 14-15 (Mitau).)*fn39
The contractors herein were highly sophisticated. (Cf. Crestview Cemetery Assn. v. Dieden (1960) 54 Cal.2d 744, 751 ["we must keep in mind [the contract parties] were not novices or inexperienced"].) The record shows that none were too shy, too ignorant, or too weak to assert any of their rights.*fn40 Yet they remained inexplicably silent.
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 (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.)
Thus, Riverside Heights did not hold that a failure to object to payments was generally inadmissible or unpersuasive on the issue of mutual intent at the time of contracting. As we have pointed out in a prior decision, it merely upheld the trial court's conclusion as to the intention of the parties in that particular case, which was based on other evidence of mutual intent. (Caletti v. State (1941) 45 Cal.App.2d 302, 305-306.) Properly read, Riverside Heights does no more than support the view that when extrinsic evidence of intent is in conflict, the trial court's resolution of that conflict will be upheld if it is supported by substantial evidence. (Riverside Heights, supra, 148 Cal. at p. 467 ["With the conclusion of the lower court on such conflicting evidence we cannot interfere"]; see Winet, supra, 4 Cal.App.4th at pp. 1165-1166.)
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 [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 [two-year period]; see Employers Reinsurance Co. v. Superior Court (2008) 161 Cal.App.4th 906, 922 ["It should not matter whether the parties' agents who originally drafted the contract participated in the performance, or have long since left the scene"].)*fn41
Accordingly, assuming plaintiffs have tendered an ambiguity regarding allocation of the proceeds or value of system power pool sales or trades, the long course of dealing between the parties clarifies that ambiguity against them.
The Bad Faith Claim
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.*fn42 We disagree.
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.
We agree with plaintiffs that, "The law implies in every contract . . . a covenant of good faith and fair dealing. 'The implied promise requires each contracting party to refrain from doing anything to injure the right of the other to receive the agreement's benefits.'" (Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, 720.)*fn43 But there is no bad faith when a party does that which is explicitly allowed by an agreement, or declines to renegotiate an agreement. (See Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 373-376 (Carma); Storek & Storek, Inc. v. Citicorp Real Estate, Inc. (2002) 100 Cal.App.4th 44, 61-64.)
The Legislature gave DWR the authority to set rates by statutes incorporated into the contract, so long as the rates were sufficient to operate the system and pay off the bonds. (§§ 11454, subd. (a), 11455.) Other statutes permitted DWR to assume the 1967 Power Sale Contract, if DWR paid at least the same amount the utilities paid. (§§ 11670, 11671.) Plaintiffs assert it would be bad faith for DWR to arbitrarily value Oroville power. We agree the contract precludes DWR from acting arbitrarily. Indeed, DWR's outside bond counsel explained in 1977 that DWR cannot "use Oroville Power without paying for it" and "Any determination" regarding payment "must be made in good faith." That is consistent with articles 38 and 39 of the contract. (See fn. 43, ante.) But we disagree that DWR acted arbitrarily in choosing to value the power at the same rate as called for by the now-cancelled 1967 Power Sale Contract, rather than reassessing the value: That was an outcome explicitly confided to DWR's discretion by statute, and therefore cannot constitute bad faith. (Carma, supra, 2 Cal.4th at pp. 373-376.) Therefore plaintiffs have not alleged bad faith to date.*fn44
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.*fn45
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.)
We concur: BLEASE , Acting P. J. HULL , J.