Free Memorandum of Contentions of Fact and Law - District Court of Federal Claims - federal

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS STOCKTON EAST WATER DISTRICT, CENTRAL SAN JOAQUIN WATER CONSERVATION DISTRICT, SAN JOAQUIN COUNTY, STOCKTON CITY, CALIFORNIA WATER SERVICE COMPANY, ) ) ) ) ) ) ) Plaintiffs, ) v. ) ) UNITED STATES OF AMERICA, ) ) Defendant. ) ___________________________________ )

No. 04-541 L Judge Christine Odell Cook Miller

DEFENDANT'S PRETRIAL MEMORANDUM OF CONTENTIONS OF FACT AND LAW

SUE ELLEN WOOLDRIDGE Assistant Attorney General Environment and Natural Resources Div. WILLIAM J. SHAPIRO United States Department of Justice Environment and Natural Resources Div. Natural Resources Section 501 I Street, Room 9-700 Sacramento, CA 95814 KRISTINE S. TARDIFF United States Department of Justice Environment and Natural Resources Div. 53 Pleasant Street, 4th Floor Concord, NH 03301 LUTHER L. HAJEK United States Department of Justice Environment and Natural Resources Division P.O. Box 663 Washington, DC 20044-0663

October 9, 2006

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OF COUNSEL: SHELLY RANDEL United States Department of the Interior Office of the Solicitor Branch of Water and Power Division of Land and Water Resources 1849 C St., N.W. Washington, DC JAMES E. TURNER Assistant Regional Solicitor United States Department of the Interior Office of the Regional Solicitor Pacific Southwest Region 2800 Cottage Way, Room E-1712 Sacramento, CA 95825

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TABLE OF CONTENTS TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v DEFENDANT'S PRETRIAL MEMORANDUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 I. II. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 DEFENDANT'S CONTENTIONS OF LAW REGARDING THE FEDERAL AND STATE LAWS WHICH IMPACT CVP OPERATIONS . . . . . . . . . . . . . . . . . . . . 3 A. Federal Reclamation Law and the Authorizations Governing the Construction and Operation of the Central Valley Project . . . . . . . . . . . . . . . 4 1. 2. 3. B. Flood Control Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 New Melones Yield Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 The Central Valley Project Improvement Act . . . . . . . . . . . . . . . . . . . . . 8

State Law Permitting the Use of Stanislaus River Water and Affecting the Operation of the CVP and New Melones . . . . . . . . . . . . . . . . . . . 10 1. Background Principles of California State Law . . . . . . . . . . . . . . . . . . . 11 a. b. c. 2. Public Trust Doctrine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Doctrine of Public Ownership of Wildlife . . . . . . . . . . . . . . . . . 13 Doctrine of Reasonable Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Reclamation's State Permits for New Melones . . . . . . . . . . . . . . . . . . . 16 a. b. c. Reclamation's 1973 State Permits . . . . . . . . . . . . . . . . . . . . . . . 17 Reclamation's 1988 State Permits . . . . . . . . . . . . . . . . . . . . . . . 21 The 1999 Revisions to Reclamation's State Permits . . . . . . . . . 23

III.

DEFENDANT'S CONTENTIONS OF LAW AND FACT REGARDING THE CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 A. The Contracts Are Subject to Future Reclamation Laws . . . . . . . . . . . . . . . . . . 26

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B.

Article 9 Limits Reclamation's Liability for Shortage of Water . . . . . . . . . . . . 28 1. The Contracts Give Reclamation Broad Discretion in Making Decisions About the Availability of Water . . . . . . . . . . . . . . 28 The Phrase "Which, In the Opinion of the Contracting Officer Are Beyond the Control of the United States" Does Not Limit the Shortage Provision in Any Significant Way . . . . . . . . . . . . . . . . . . . 30

2.

C.

Reclamation's Operations of New Melones Reservoir from 1993 to 2004 Did Not Breach Plaintiffs' Contracts . . . . . . . . . . . . . . . . . . . . . . . 37 1. 2. The Contracts Require Plaintiffs to Submit Annual Water Schedules . . 37 Reclamation Did Not Breach the Subject Contracts in 1993-1996 . . . . . 38 i. Reclamation Did Not Breach the Subject Contracts in 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Reclamation Did Not Breach the Subject Contracts in 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Reclamation Did Not Breach the Subject Contracts in 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Reclamation Did Not Breach the Subject Contracts in 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

ii.

iii.

iv.

3.

Reclamation Did Not Breach the Subject Contracts in 1997-Present . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 i. ii. The Interim Plan of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 42 Reclamation Did Not Breach the Subject Contracts in 1997-1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Reclamation did not Breach the Subject Contracts in 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Reclamation Did Not Breach the Subject Contracts in 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

iii.

iv.

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v.

Reclamation Did Not Breach the Subject Contracts in 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Reclamation Did Not Breach the Subject Contracts in 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Reclamation Did Not Breach the Subject Contracts in 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Reclamation Did Not Breach the Subject Contracts in 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Allocations After 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

vi.

vii.

viii.

ix. V.

THE SOVEREIGN ACTS DOCTRINE AND THE UNMISTAKABILITY DOCTRINE PRECLUDE A FINDING THAT THE SUBJECT CONTRACTS WERE BREACHED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 A. The Sovereign Acts Doctrine Precludes a Finding a Liability . . . . . . . . . . . . . . 49 1. 2. The CVPIA is a Sovereign Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 It Was Not Possible To Comply With CVPIA Without Using Water From New Melones Under CVPIA Section 3406(b)(2) . . . . . . . 55 a. Plaintiffs' Articulation of the "Impossibility" Standard is Not the Correct Legal Standard . . . . . . . . . . . . . . . . 55 The Other 248 CVP Water Service Contracts Are Not Relevant to the Impossibility of Performance Inquiry . . . . . . . . 58 Plaintiffs' "Physical Impossibility" Argument is Misplaced . . . 60

b.

c. B.

The Contracts Do Not Contain Unmistakable Terms Exempting Plaintiffs From the Application of Future Legislation . . . . . . . . . . . . . . . . . . . . 63

V.

PLAINTIFFS HAD NO CONTRACTUAL RIGHTS UNTIL AFTER THEIR WATER CONSERVATION PLANS WERE APPROVED . . . . . . . . . 64

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VI.

THE THIRD PARTY PLAINTIFFS ARE NOT INTENDED THIRD-PARTY BENEFICIARIES OF THE SEWD CONTRACT . . . . . . . . . . . . . . . . 65 A. The Third Party Plaintiffs Are Not Identified as Intended Third Party Beneficiaries in SEWD's Contract . . . . . . . . . . . . . . . . . . . . . . . . . . 66 An Intent to Directly Benefit Water Users SEWD's Contract Would Be Contrary to Reclamation Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Extrinsic Evidence Will Not Unequivocally Demonstrate That The Third Party Plaintiffs Are Intended Third-Party Beneficiaries . . . . . . . . . . 69

B.

C.

VII.

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

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TABLE OF AUTHORITIES FEDERAL CASES Allegre Villa v. United States, 60 Fed. Cl. 11 (2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Amber Resources Co. v. United States, 68 Fed. Cl. 535 (Fed. Cl. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Barcellos & Wolfsen, Inc. v. Westlands Water Dist., 849 F. Supp. 717 (E.D. Cal. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Barcellos and Wolfsen, Inc. v. Westlands Water Dist., 899 F.2d 814 (9th Cir. 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 California v. United States, 438 U.S. 645 (1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 21 Carabetta Enterprises, Inc. v. United States, 58 Fed. Cl. 563 (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Casitas Municipal Water Dist. v. United States, No. 05-168L, slip op. (Fed. Cl. Oct. 2, 2006) (Weise, J.) . . . . . . . . . . . . . . . . . . . . . 55-58 Centex Corp. v. United States, 395 F.3d 1283 (Fed. Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Central Delta Water Agency v. Bureau of Reclamation, 452 F.3d 1021 (9th Cir. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Central Delta Water Agency v. United States, 306 F.3d 938 (9th Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Chancellor Manor v. United States, 331 F.3d 891 (Fed. Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402 (1971) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Coast-to-Coast Fin. Corp. v. United States, 45 Fed. Cl. 796 (2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

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German Alliance Ins. Co. v. Home Water Supply Co. 226 U.S. 220 (1912) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Glass v. United States, 258 F.3d 1349 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 H.F. Allen Orchards v. United States, 749 F.2d 1571 (Fed. Cir. 1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67, 68 Henderson County Drainage Dist. No. 3 v. United States, 53 Fed. Cl. 48 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Horowitz v. United States, 267 U.S. 458 (1925) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Jones v. United States, 1 Ct. Cl. 383 (1865) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Klamath Irrig. Dist. v. United States, 67 Fed. Cl. 504 (2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Klamath Water Users Protective Ass'n v. Patterson, 204 F.3d 1206 (9th Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Natural Resources Defense Council v. Patterson, 333 F.Supp. 2d 906 (E.D. Cal. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 16 Natural Resources Defense Council v. Houston, 146 F.3d 1118 (9th Cir. 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Orff v. United States, 358 F.3d 1137 (9th Cir. 2004), aff'd on other grounds, 125 S. Ct. 2606 (2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 O'Neill v. United States, 50 F.3d 677 (9th Cir. 1995), cert. denied, 516 U.S. 1028 (1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27, 32, 52, 63 O'Neill v. United States, 231 Ct. Cl. 823 (1982) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Peterson v. U.S. Dep't of the Interior, 899 F.2d 799 (9th Cir. 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

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R&B Falcon Drilling Co. v. Am. Exploration Co., 154 F. Supp.2d 969 (S.D. Texas 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Roedler v. Dept. of Energy, 255 F.3d 1347 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66, 68 Seaboard Lumber Co. v. United States, 308 F.3d 1283 (Fed. Cir. 2002), affirming, 41 Fed. Cl. 401 (1998) . . . . . . . . . . . . . 36, 61 Smith v. Central Arizona Water Conservation District, 418 F.3d 1028 (9th Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Stockton East Water Dist. v. United States, 70 Fed. Cl. 515 (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Stockton East Water Dist. v. United States, No. CV-F-93-5896 OWW, slip op. (E.D. Cal. Nov. 4, 1996) . . . . . . . . . . . . . . . . . . . . 52 Transatlantic Fin. Corp. v. United States, 363 F.2d 312 (Fed. Cir. 1966) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Turlock Irrig. Dist. v. Zanker, 140 Cal.App.4th 1047 (Cal. Ct. App. 5th Dist. 2006) . . . . . . . . . . . . . . . . . . . . . . . . 14, 15 United States v. Nordic Vill., Inc., 503 U.S. 30 (1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 United States v. SWRCB, 182 Cal.App.3d 82 (Cal. Ct. App. 1st Dist. 1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 17 United States v. Westlands Water Dist., 134 F. Supp. 2d 1111 (E.D. Cal. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 United States v. Winstar Corp., 518 U.S. 839 (1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49, 51 Westlands Water District v. United States, 850 F.Supp. 1388 (E.D. Cal. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Yankee Atomic Elec. Co. v. United States, 112 F.3d 1569 (Fed. Cir. 1997), cert. denied, 524 U.S. 951 (1998) . . . . . . . 49, 51, 54, 55

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STATE CASES Allegretti & Co. v. County of Imperial, 138 Cal.App.4th 1261 (Cal. Ct. App. 4th Dist. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Cal. Trout v. Sup. Ct. of Sacramento County, 218 Cal.App.3d 187 (Cal. Ct. App. 3d Dist. 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Environmental Defense Fund, Inc. v. East Bay Municipal Utility Dist., 26 Cal.3d 183 (Cal. 1980) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 16 Marks v. Whitney, 6 Cal.3d 251 (Cal. 1971) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Nat'l Audubon Society v. Superior Ct. of Alpine County, 658 P.2d 709 (Cal. 1983) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 14 People v. Truckee Lumber Co., 116 Cal. 397 (1897) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 State Water Resources Control Board Cases, 39 Cal.Rptr.3d 189 (Cal. Ct. App. 3rd Dist. 2006), cert denied, 75 U.S.L.W. 3081 (U.S. Oct. 2, 2006)(No. 96-238) . . . . . . . . . . . . . . . . . . . 12, 17, 24, 30 United States v. SWRCB, 182 Cal.App.3d 82 (Cal. Ct. App. 1st Dist. 1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 17 STATUTES 43 U.S.C. § 485h(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 43 U.S.C. §§ 485h(d), (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 43 U.S.C. § 383 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 43 U.S.C. § 423e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 43 U.S.C. § 485a(g) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 5 U.S.C. § 706 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Flood Control Act of December 22, 1944, 58 Stat. 887 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 26 Central Valley Project Improvement Act of October 30, 1992, Title XXXIV, Pub. L. 102-575, 106 Stat. 4706 ("CVPIA") . . . . . . . . . . . . . . . 1, 8, 10, 27

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Flood Control Act of October 23, 1962, Pub. L. 87-874, 76 Stat. 1173 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 6, 27 STATE STATUTES Cal. Const. Art. 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13, 14 Cal. Water Code § 100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Cal. Water Code § 1260 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Cal. Water Code § 275 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 15 Cal. Water Code §§ 1310-1317 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Cal. Water Code § 1321 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Cal. Water Code § 102 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 West's Ann. Cal. Fish & Game Code § 5937 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

REGULATIONS 33 C.F.R. § 208.11 (1980) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

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DEFENDANT'S PRETRIAL MEMORANDUM On September 25, 2006, Plaintiffs Stockton East Water District ("SEWD"), Central San Joaquin Water Conservation District ("Central"), San Joaquin County, Stockton City and California Water Service Company (collectively, "Third Party Plaintiffs"), submitted their pretrial memorandum of contentions of fact and law. Pursuant to RCFC, Appendix A, ¶ 14(b), Defendant hereby submits this responsive pretrial memorandum of contentions of fact and law. I. INTRODUCTION This case arises out of the operation of the Central Valley Project ("CVP"), which consists of 20 reservoirs, 11 power plants, and over 500 miles of major canals. See http://www.usbr.gov/dataweb/html/cvp.html#general (last visited Sept. 19, 2006). In operating the CVP, the United States Bureau of Reclamation ("Reclamation") is faced with what has been accurately described as "an extremely difficult task: to operate the country's largest federal water management project in a manner so as to meet the Bureau's many obligations." Central Delta Water Agency v. Bureau of Reclamation, 452 F.3d 1021, 1027 (9th Cir. 2006). These obligations include: compliance with federal reclamation laws, including the specific authorizing statutes for the CVP and its components; compliance with other federal laws, including flood control laws, the Central Valley Project Improvement Act, Title XXXIV, Pub. L. 102-575, 106 Stat. 4607 ("CVPIA"), and the Endangered Species Act, 16 U.S.C. § 1531 et seq. ("ESA"); and compliance with California state law, including the numerous conditions set forth in the permits issued to it by the State Water Resources Control Board ("SWRCB" or "Board"). In addition, the delivery of CVP water for consumptive uses such as agriculture or municipal and industrial ("M&I") use generally occurs pursuant to water service contracts entered into between water districts and

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Reclamation. Currently, there are approximately 250 such water service contracts for the CVP. The balancing of these obligations frequently requires difficult decisions regarding the allocation of a limited (and often insufficient) supply of available water. As the Ninth Circuit has explained in one of countless cases that have arisen out of the operation of the CVP, Congress recognized the difficulties presented in operating the CVP and granted Reclamation "considerable discretion in determining how to meet those obligations." Central Delta Water Agency, 452 F.3d at 1027. That discretion is preserved in all CVP water service contracts. This case involves two of Reclamation's water service contracts. Plaintiffs allege that Reclamation breached these contracts by failing to make 155,000 AF of water available to them each year between 1993 and 2004.1/ The parties previously filed cross-motions for summary judgment on the question of whether Defendant had breached the subject contracts during any of the years in question. In its opinion of April 10, 2006, the Court denied the parties' crossmotions for summary judgment. Stockton East Water Dist. v. United States, 70 Fed. Cl. 515 (2006). In so doing, the Court articulated the questions that need to be addressed by the parties at trial. Defendant's contentions of law and fact with respect to these question are set forth below. The Court should find that Defendant did not breach its contracts with Central and SEWD for three independent and alternative reasons. First, Plaintiffs' contractual rights are subject to both state law and to future federal Reclamation laws. Accordingly, a reduction in the

Plaintiffs also allege Fifth Amendment takings claims based on the same operative facts and for the same period of time. The takings claims are stayed pending resolution of the contract claims and are not at issue in the trial scheduled to begin on October 23, 2006. See Pls.' Am. Compl. (dated Apr. 20, 2004). 2

1/

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amount of water available for delivery to Plaintiffs due to Reclamation's compliance with state and federal law is not, as a matter of law, a breach of contract. See discussion, infra, at Sec. II, III.A. Second, the contracts' shortage provisions, which give Reclamation broad discretion to make decisions about the availability of water, limit Defendant's liability for breach of contract. See discussion, infra, at Sec. III.B. This is especially true when one considers the annual water schedules Plaintiffs submitted and the quantities of water Reclamation delivered. See discussion, infra, at Sec. III.C. Finally, even if the Court determines that Defendant would otherwise be liable for breach of contract under the terms of the contracts themselves, Defendant's compliance with the CVPIA is not a breach of contract due to the application of the sovereign acts doctrine and the doctrine of unmistakability. II. DEFENDANT'S CONTENTIONS OF LAW REGARDING THE FEDERAL AND STATE LAWS WHICH IMPACT CVP OPERATIONS Although the CVP is a federal reclamation project, the operation of the CVP is impacted by both federal and state law. In general, federal law governs construction of CVP dams and related facilities and ongoing operation of the CVP, including the operation of New Melones Reservoir. Applicable federal law is described below in Section II.A. California state law also affects the operation of the CVP because federal law requires the United States, in its operation of reclamation projects such as the CVP, to comply with state laws relating to the control, appropriation, use or distribution of water unless the law in question is inconsistent with clear congressional directives. The restrictions placed on the operation of the CVP under California law are a critical aspect of this case. The relevant aspects of state law are described below in Section II.B.

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A.

Federal Reclamation Law and the Authorizations Governing the Construction and Operation of the Central Valley Project

The CVP is a vast water management system that has been constructed over several decades. New Melones Reservoir, which is located on the Stanislaus River, was first authorized by the Flood Control Act of December 22, 1944, 58 Stat. 887, to alleviate flooding problems along the Stanislaus and Lower San Joaquin Rivers. The CVP was subsequently expanded by additional authorizing acts, including section 203 of the Flood Control Act of October 23, 1962, Pub. L. 87-874, 76 Stat. 1173 ("1962 Act"), which specifically modified the authorization for New Melones. The 1962 Act required that, upon the completion and construction of the New Melones dam and power plant, the project "shall become an integral part of the [CVP] and be operated and maintained by the Secretary of the Interior pursuant to the Federal reclamation laws, except that the flood control operation of the project shall be in accordance with the rules and regulations prescribed by the Secretary of the Army."2/ 1. Flood Control Operations

The operation of New Melones for flood control purposes is thus governed by federal law. The rules and regulations governing flood control operations of New Melones are set forth in 33 C.F.R. § 208.11 (1980), as amended, and are explained in a report prepared by the Army Corps of Engineers titled "Report on Reservoir Regulation for Flood Control," for the New Melones Dam and Lake, dated January 1980 ("1980 Flood Control Operations Report") (DX-7). This report, which serves as the guide for operating New Melones for flood control purposes, defines the objectives for the operation of the New Melones project as follows:

2/

The authorization for the CVP was further amended and modified in 1992 with the enactment of the CVPIA, which is discussed, infra, at Section II.A.3. 4

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a.

To restrict flows in the Stanislaus River downstream from New Melones Dam to a controlling rate of 8,000 cubic feet per second ("cfs") at the stream gage at Orange Blossom Bridge, insofar as possible. To provide the maximum conservation storage practicable without impairing the flood control function of the reservoir. To provide the maximum amount of power practicable without impairing the flood control and conservation functions of the reservoir. To provide releases to enhance an anadromous fishery on the lower Stanislaus River.3/ To provide releases to meet established water quality objectives for the Stanislaus River and the San Joaquin River at Vernalis. To maintain a minimum pool of at least 300,000 AF for power and recreation.

b.

c.

d.

e.

f.

DX-7 at 26 (footnote added). Under the applicable flood control rules and regulations, 450,000 AF of the 2.4 million AF capacity of New Melones is reserved for flood control. This flood control space must be made available annually from November 1 to March 20. In addition, depending on forecasts of runoff and irrigation demand, as much as 450,000 AF of conditional flood control space must be made available annually between March 20 to June 1, decreasing to zero on August 1. See DX-7 at 24, A-1 to A-5.

The 1980 Flood Control Operations Report identifies the "schedule of required minimum flows below Goodwin dam" based on a 1962 report by the United States Fish and Wildlife Service. DX-7 at 28 (emphasis added). The minimum releases identified in the report for fish purposes were 98,000 AF annually in normal water years and 69,000 AF annually in dry water years. Id. 5

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2.

New Melones Yield Studies

The 1962 Act, which authorized construction of New Melones Dam, provided that, before initiating any diversion of water from the Stanislaus River Basin in connection with the operation of the Central Valley project, the Secretary of the Interior shall determine the quantity of water required to satisfy all existing and anticipated future needs within the basin and the diversions shall at all times be subordinate to the quantities so determined: Provided further, That the Secretary of the Army adopt appropriate measures to insure the preservation and propagation of fish and wildlife . . . And provided further, That the Secretary of the Army give consideration during the preconstruction planning for the New Melones project to the advisability of including storage for the regulation of streamflow for the purpose of downstream water quality control. P.L. 87-874. To assist the Secretary in complying with this mandate, the Department of the Interior ("DOI") prepared the "New Melones Unit, Central Valley Project - California, Stanislaus River Basin Alternative and Water Allocation, Special Report, September 1980" ("1980 Special Report"), JX-5, and a 1981 Record of Decision, JX-6. These documents show that pre-contractual yield studies anticipated that operations at New Melones would impound up to 2,400,000 AF of water behind the dam and create 180,000 AF of water that could be marketed to contractors. The 1980 Special Report, for example, anticipated that: [w]ith a gross reservoir capacity of 2,400,000 [AF] and a minimum pool of 300,000 [AF] . . . an estimated 180,000 [AF] of new water supply would be provided to serve the needs of the Stanislaus River Basin and other possible CVP service areas. In addition, 98,000 [AF] of water would be available annually for downstream fishery, and up to a maximum of 70,000 [AF] of water annually to meet specified water quality criteria on the Stanislaus and Lower San Joaquin Rivers, as authorized. JX-5 at 2.4/ Based on these early studies, Reclamation was willing to market up to 155,000 AF

4/

A 1982 Basis of Negotiation mirrored this early expectation: 6

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of the expected 180,000 AF of marketable yield to contractors. The remaining 2,245,000 AF of water was to be stored or used to serve other beneficial purposes, including fish and water quality purposes. The 180,000 AF of marketable yield did not materialize for four primary reasons. First, the early reservoir studies, including the 1980 Special Report, had anticipated that no more than 98,000 AF of water would be needed for fish in any year. However, these early estimates proved to be far too low. Under an agreement with the State of California's Department of Fish and Game ("DFG") known as the 1987 DFG Agreement, which is a permit requirement, releases for fish have averaged 183,789 AF, a nearly 100% increase of the expected releases anticipated in the 1980 Special Report. In five of the 12 years relevant to this case, releases under the 1987 DFG Agreement approached 302,000 AF, a three-fold increase over expected fish-related releases. Second, early studies anticipated that releases for water quality purposes would use only 70,000 AF. That amount of water has been inadequate in many years. In 1994, 2001, 2002, and 2003, water quality releases exceeded 130,000 AF, nearly twice the quantity expected. Third, compliance with CVPIA has required significant water releases from New Melones. During the relevant time period, more than 1,500,000 AF of water has been required to comply with CVPIA, an average of more than 125,000 AF of water every year. These

New Melones Reservoir will be operated as authorized at the full maximum capacity of 2,400,000 [AF] and would provide 180,000 [AF] of conservation yield to meet present and future agriculture and [M&I] water needs until approximately the year 2020. JX-8 at 2. 7

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releases were not anticipated at the time of the 1980 Special Report or at the time the parties executed the contracts. Finally, California experienced a record drought between 1987 and 1992 that had a significant impact on Reclamation's subsequent operation of New Melones Reservoir. At the beginning of 1987, for example, New Melones storage approached 2,000,000 AF. See DX-224. In 1992, reservoir storage levels dropped below 90,000 AF, and by the end of that year, storage levels were below 120,000 AF, or approximately 5% of capacity. See id. The first year of this lawsuit ­ 1993 ­ coincided with the end of this record drought, when storage levels were low and uncertainty of future hydrology was high. These unexpected increases in the quantity of water needed to meet existing requirements, together with the 1987-1992 drought, severely reduced the available marketable yield in any particular year and greatly impacted operational decisions to ensure enough water would be available to meet these requirements in future years. 3. The Central Valley Project Improvement Act

The operation of the CVP was significantly impacted in 1992 by the enactment of CVPIA, a landmark piece of legislation that sought to reform and address the impacts of the CVP on fish, wildlife and associated habitats. The CVPIA specifically amended the CVP's authorization by making "fish and wildlife mitigation, protection and restoration purposes" equal in priority to operation for irrigation and domestic uses, and by making operation for "fish and wildlife enhancement" equal in priority to operation for power purposes. CVPIA, Sec. 3406(a) (emphasis added). By adding fish and wildlife obligations to the authorized purposes of the CVP, Congress sought to achieve a reasonable balance among competing demands for use of

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CVP water that did not previously exist as a matter of federal law. See CVPIA, Sec. 3402 (purposes of the CVPIA). This change applies to all CVP dams and reservoirs, including New Melones. The CVPIA required Reclamation to operate the CVP to meet all obligations under state and federal law, including the federal ESA and all decisions of the SWRCB. Id., Sec. 3406(b). One of CVPIA's most ambitious goals was the requirement that the Secretary of the Interior develop and implement a program to double the number of anadromous fish in Central Valley rivers and streams, including in the Stanislaus River, within 10 years (by 2002). Id., Sec. 3406(b)(1). This provision contemplates that the natural production of anadromous fish will not only be doubled, but that those increased numbers "will be sustainable, on a long-term basis[.]" Id. To achieve the goals of this doubling program, the CVPIA authorizes and requires CVP operations to be modified "to provide flows of suitable quality, quantity, and timing to protect all life stages of anadromous fish[.]" Id., Sec. 3406(b)(1)(B). In addition, Section 3406(b)(2) authorizes and requires the Secretary to dedicate 800,000 AF of CVP yield annually for fish purposes.5/ This 800,000 AF of water is referred to as "(b)(2) water."

5/

Section 3406(b)(1)(B) requires the Secretary to: dedicate and manage annually eight hundred thousand acre-feet of Central Valley Project yield for the primary purpose of implementing the fish, wildlife, and habitat restoration purposes and measures authorized by this title; to assist the State of California in its efforts to protect the waters of the San Francisco Bay/Sacramento-San Joaquin Delta Estuary; and to help to meet such obligations as may be legally imposed upon the Central Valley Project under State or Federal law following the date of enactment of this title, including but not limited to additional obligations under the Federal Endangered Species Act.

Id. 9

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Implementation of CVPIA has had a significant impact on the operation of the CVP, and the amount of water that Reclamation has been able to make available to Plaintiffs. To comply with CVPIA, Reclamation modified its operation of the CVP, including New Melones, to provide flows of suitable quality, quantity, and timing to protect all life stages of anadromous fish in the Stanislaus River. Water release decisions are coordinated with input from the United States Fish and Wildlife Service ("FWS") and the DFG, as required by the CVPIA. Id., Sec. 3406(b)(1). These operational changes, including the use of 800,000 AF of CVP yield for fish and wildlife restoration purposes under Section 3406(b)(2), have reduced the quantity of water available for delivery to CVP contractors, including to Plaintiffs. Defendant's witnesses will provide testimony at trial regarding the impact of the enactment and implementation of the CVPIA on CVP operations, including the operation of New Melones. Defendant's witnesses will explain the use of (b)(2) water throughout the CVP in compliance with the CVPIA, including the justification for releasing water from New Melones under (b)(2). Defendant's witnesses will also explain that despite several years of significant (b)(2) releases from New Melones since 1992, the anadromous fish doubling goal set by the CVPIA has not been met on the Stanislaus. These difficulties demonstrate why the use of (b)(2) water on the Stanislaus River remains an important part of CVPIA implementation and compliance. B. State Law Permitting the Use of Stanislaus River Water and Affecting the Operation of the CVP and New Melones

California state law impacts the operation of the CVP as a result of Section 8 of the Reclamation Act of 1902, which states in relevant part: Nothing in this Act shall be construed as affecting or intending to affect or in any way interfere with the laws of any State or Territory relating to the control, appropriation, use, or distribution of water used in irrigation, or any vested right 10

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acquired thereunder, and the Secretary of the Interior, in carrying out the provisions of this Act, shall proceed in conformity with such laws. . . . 43 U.S.C. § 383. The Supreme Court has explained that this provision requires the United States, in its operation of a reclamation project such as the CVP, to comply with state laws relating to the control, appropriation, use or distribution of water unless the law in question is inconsistent with clear congressional directives. California v. United States, 438 U.S. 645, 668 (1978). 1. Background Principles of California State Law

California law relating to the control, appropriation, use and distribution of water is extensive. These state laws are relevant here because Plaintiffs' contractual rights are derived from, and thus limited by, the water rights acquired by Reclamation for New Melones under state law. Plaintiffs do not possess a contractual right to receive and use water from New Melones under their contracts if the delivery and use of such water are not supported by background principles of state law. An understanding of California law and the limits that such law place on the operation of the CVP and, correspondingly, on Plaintiffs' contractual rights, necessarily begin with several state law doctrines that govern the use of water in California. Plaintiffs' consumptive use of water from the Stanislaus River is subject to the public trust doctrine, and the doctrine of public ownership of wildlife, and the doctrine of reasonable and beneficial use.

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a.

Public Trust Doctrine

Under the public trust doctrine, a public trust easement exists and provides protection for "the values and uses of waterways." Nat'l Audubon Society v. Superior Ct. of Alpine County, 658 P.2d 709, 719 (Cal. 1983). This doctrine, which is "sufficiently flexible to encompass changing public needs[,]" protects the public's interest in traditional uses of waterways such as navigation, commerce and fisheries, but also protects ecological and recreational values. Id. (quoting Marks v. Whitney, 6 Cal.3d 251, 259-60 (Cal. 1971)). The State of California has "the sovereign power and duty to exercise continued supervision over the trust." Id. at 721. Consequently, "parties acquiring rights in trust property generally hold those rights subject to the trust, and can assert no vested right to use those rights in a manner harmful to the trust."6/ Id. at 721. In addition, because the sovereign power under the public trust doctrine extends to the adjustment or revocation of previously granted rights to use public trust resources, a person using public trust resources ­ including the diversion and consumptive use of water ­ has no right or expectation that limits on that use will not change over time. Id. at 723; see also id. at 728 ("the state is not confined by past allocation decisions which may be incorrect in light of current knowledge or inconsistent with current needs" but instead "has the power to reconsider allocation decisions even though those decisions were made after due consideration of their effect on the public trust"). Here, the appropriative water rights of the United States, and the derivative contractual rights of its CVP contractors, are both subject to the public trust doctrine. State Water Resources Control Board ("SWRCB") Cases, 39 Cal.Rptr.3d 189, 294 n.54 (Cal. Ct.

6/

Enforcement of the public trust doctrine is not limited to action by the State of California. Instead, the Supreme Court of California has held that any member of the public has standing to sue to protect the public trust. Id. at 716 n.11. 12

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App. 3rd Dist. 2006), cert denied, 75 U.S.L.W. 3081 (U.S. Oct. 2, 2006) (No. 96-238). b. Doctrine of Public Ownership of Fish and Wildlife

California state law also recognizes and protects the public's ownership of fish and wildlife. For example, the state has long recognized that "[t]he fish within our waters constitute the most important constituent of that species of property commonly designated as wild game, the general right and ownership of which is in the people of the state." People v. Truckee Lumber Co., 116 Cal. 397, 399 (1897). Under California law, the State possesses "the right and power to protect and preserve such property for the common use and benefit[.]" Id. at 399-400. The use of the State's waters in a manner that is injurious to the fish in those waters violates this doctrine and is subject to enforcement action by the State and may be enjoined by the courts as a public nuisance. Id. at 399-402. c. Doctrine of Reasonable Use

In addition, the right to use water under California law is limited by the doctrine of reasonable use. Allegretti & Co. v. County of Imperial, 138 Cal.App.4th 1261, 1279 (Cal. Ct. App. 4th Dist. 2006). This doctrine is embodied in Article 10, Section 2 of California's Constitution, which provides in pertinent part: It is hereby declared that because of the conditions prevailing in this State the general welfare requires that the water resources of the State be put to beneficial use to the fullest extent of which they are capable, and that the waste or unreasonable use or unreasonable method of use of water be prevented, and that the conservation of such waters is to be exercised with a view to the reasonable and beneficial use thereof in the interest of the people and for the public welfare. The right to water or to the use or flow of water in or from any natural stream or water course in this State is and shall be limited to such water as shall be reasonably required for the beneficial use to be served, and such right does not and shall not extend to the waste or unreasonable use or unreasonable method of use or unreasonable method of diversion of water.

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Cal. Const. Art. 10, Sec. 2. Although the state legislature is authorized to enact laws in furtherance of the policy set forth in Section 2, the section is "self-executing." Id. As

with the public trust doctrine, private parties may enforce the prohibition against unreasonable diversions and uses of the State's waters through court action. Environmental Defense Fund, Inc. v. East Bay Municipal Utility Dist. ("EDF v. EBMUD"), 26 Cal.3d 183, 193-200 (Cal. 1980). In addition, the doctrine of reasonable use is not static, but is sufficiently flexible to adapt to changing circumstances. See id. at 194 ("[w]hat constitutes reasonable water use is dependent upon not only the entire circumstances presented but varies as the current situation changes"); United States v. SWRCB, 182 Cal.App.3d 82, 130 (Cal. Ct. App. 1st Dist. 1986) (holding that the SWRCB has authority to modify permit conditions when "changed circumstances revealed in new information" show that the use of water authorized under the permit has become unreasonable). Accordingly, appropriative water rights ­ and contractual rights derived therefrom ­ remain subject to the requirement of reasonable use. The state constitutional limitation on unreasonable use and unreasonable method of diversion is implemented "in a myriad of ways" including the State's Water Code. Turlock Irrig. Dist. v. Zanker, 140 Cal.App.4th 1047, 1061 (Cal. Ct. App. 5th Dist. 2006). The Water Code provides that all water within the State of California "is the property of the people of the State[.]" Cal. Water Code § 102. However, as in most western states that follow some variation of the prior appropriation doctrine, "the right to the use of water may be acquired by appropriation in the manner provided by law."7/ Id. This right to use of water is regulated under California law

7/

California follows a "dual-system" of water rights under which both appropriative and riparian rights are recognized. Nat'l Audubon Society, 33 Cal.3d at 441, 658 P.2d at 724. The water rights acquired by the United States under California state law for the CVP are appropriative 14

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"both to protect water users and to protect the resource itself." Turlock Irrig. Dist., 140 Cal.App.4th at 1061. The State's Water Code also governs the appropriation of unappropriated water in California, and incorporates the state constitutional prohibition on unreasonable use or diversion of water. See Cal. Water Code § 100. In addition, the SWRCB ­ the state agency responsible for considering applications for and issuing permits authorizing the diversion and use of the State's waters ­ is authorized and directed under the Water Code to take necessary actions to prevent the unreasonable use of water. See Cal. Water Code § 275. The State constitutional limitation on unreasonable use or method of diversion, as well as the underlying doctrines discussed above, are also implemented through certain provisions of California's Fish and Game Code, including § 5937 of that Code, which governs the operation of dams in California: The owner of any dam shall allow sufficient water at all times to pass through a fishway, or in the absence of a fishway, allow sufficient water to pass over, around or through the dam, to keep in good condition any fish that may be planted or exist below the dam. During the minimum flow of water in any river or stream, permission may be granted by the department to the owner of any dam to allow sufficient water to pass through a culvert, waste gate, or over or around the dam, to keep in good condition any fish that may be planted or exist below the dam, when, in the judgment of the department, it is impracticable or detrimental to the owner to pass the water through the fishway. West's Ann. Cal. Fish & Game Code § 5937. See Natural Resources Defense Council ("NRDC") v. Patterson, 333 F.Supp.2d 906, 913-14, 924-25 (finding that Reclamation's operation of Friant Dam, which is located on the San Joaquin River and is part of the CVP, violated § 5937); NRDC v. Houston, 146 F.3d 1118, 1131-32 (9th Cir. 1998) (finding CVPIA did

water rights. 15

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not preempt application of § 5937).8/ 2. Reclamation's State Permits for New Melones

The State of California has developed and enacted "a comprehensive system for development, issuance, and administrative regulation of appropriative water rights." EDF v. EBMUD, 26 Cal.3d at 195. Under this system, any person wishing to appropriate water must file an application for a permit with the SWRCB. Id. (citing Cal. Water Code § 1260). Notice of the application is provided to the public and to certain interested parties. Id. at 196 (citing Cal. Water Code §§ 1310-1317, 1321). State law allows "any person" to file a protest to the application based on interference with prior vested water rights or "on grounds that the appropriation will not best conserve the public interest or will be contrary to law." Id. (citing applicable Cal. Water Code and Admin. Code provisions). The SWRCB thereafter holds a public hearing in which all interested parties may participate. Id. Following consideration of factors required by state law, including factors related to the public interest and beneficial use, the Board may issue a permit authorizing the appropriation and use of the state's waters. Id. at 197. Such permits are subject to state law, including any terms and conditions imposed by the Board. Id. Although Reclamation retains discretion in terms of how it will comply with its permit conditions, it lacks discretion to violate those conditions. Central Delta Water Agency, 452 F.3d at 1026. In addition, the Board retains jurisdiction to revise or supplement permit terms and conditions as necessary based on changed circumstances or new information. Id.

The court noted that prior state court decisions indicated that the amount of water that must be released from a dam into a dry river to comply with § 5937 is "enough to restore the historic fishery." NRDC v. Patterson, 333 F. Supp.2d at 924 (quoting Cal. Trout v. Sup. Ct. of Sacramento County, 218 Cal.App.3d 187, 210 (Cal. Ct. App. 3d Dist. 1990)). 16

8/

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As set forth below, Reclamation applied for and obtained permits from the SWRCB for the use of water from the Stanislaus River in connection with the development and operation of the New Melones Reservoir. Although Reclamation possesses the right to use the waters from the Stanislaus River under these permits, under California law such usufructory water rights, unlike real property rights, are considered "limited and uncertain" because the quantity of water actually available for use "is largely determined by natural forces." SWRCB, 182 Cal.App.3d at 104. Reclamation's permits, including the terms and conditions imposed therein, are highly relevant to this case because Plaintiffs' contractual right to receive water from New Melones is subject to, and limited by, the "limited and uncertain" appropriative water rights obtained by Reclamation for New Melones. See SWRCB Cases, 39 Cal.Rptr.3d at 294 n.54 (holding that an appropriator of water cannot give away, by contract, more rights than it has under state law); Klamath Irrig. Dist. v. United States, 67 Fed. Cl. 504, 535 (2005) (applying, in a similar context, the venerable maxim "nemo dat qui non habet" or "one who does not have cannot give"). a. Reclamation's 1973 State Permits

Following Congressional authorization for the construction of New Melones, Reclamation applied for permits from the SWRCB to appropriate water from the Stanislaus River for power generation, irrigation, domestic, municipal, industrial, fish culture, recreation and water quality purposes. Although studies conducted in connection with these applications predicted the availability of unappropriated water, those studies also revealed a significant fluctuation in the quantity of water available annually. As summarized by the SWRCB, based on the hydrologic cycle equivalent to the period of 1923 to 1953, "annual average surplus is an estimated 335,000 acre-feet and varies from zero which occurs in nine years out of the period of

17

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study to 1,980,000 acre-feet." SWRCB Decision 1422 ("D-1422") at 10. Several groups filed protests to the federal government's permit applications, including prior right holders and California DFG. These protests were resolved through a combination of terms and conditions imposed on the permits eventually issued by the SWRCB, including the following: · Conditions Related to Senior Water Rights. A number of senior water rights holders, including Oakdale Irrigation District ("OID"), South San Joaquin Irrigation District ("SSJID"), Calaveras County Water District, and Tuolumne County Water District, protested Reclamation's application due to concerns over the impact of New Melones operations on their senior water rights.9/ Because Reclamation's operation of New Melones could not interfere with these senior water rights, Reclamation and OID/SSJID entered into an agreement to define those prior rights. Under this agreement, which provided for the dismissal of the districts' protests, Reclamation is required to deliver all of the inflow of the New Melones Reservoir up to 654,000 AF in each year for rediversion by the districts at Goodwin Dam in satisfaction of the OID/SSJID's senior water rights. The SWRCB recognized OID and SSJID's rights and noted that these districts divert most of the flow of the Stanislaus River, other than flood flows. As a result of these existing diversions, the SWRCB noted that the Stanislaus River "is frequently dry immediately below Goodwin Dam during the summer months." D-1422 at 7-8. Reclamation entered into similar agreements with Calaveras and Tuolumne in

9/

OID and SSJID are the "major holders of prior rights to the water of the Stanislaus River." D1422. These districts constructed the original Melones Reservoir, along with three other reservoirs (Tulloch, Donnells and Beardsley) that are known as the Tri-Dam Project. 18

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1972. In D-1422, the SWRCB indicated that "[a]ny permits issued will be subject to all prior rights and will not authorize any interference with such rights" and noted that such a condition is a standard permit term. Id. at 6. · Conditions Related to Water Quality. Reclamation's applications to the SWRCB also generated concerns regarding water quality, which is measured at the USGS gaging station at Vernalis, just below the point where the Stanislaus flows into the San Joaquin River. Water quality is assessed by measuring the concentration of total dissolved solids ("TDS"), which includes salinity. An increase in salinity adversely affects other beneficial uses of the water. The Board recognized that the "Stanislaus River is an important source of dilution water required to reduce the TDS in the lower San Joaquin River to usable levels." Id. at 11. In setting water quality related conditions, the Board recognized "the uncertainty inherent in the problems of proper releases." Id. at 13. The Board thus imposed a condition requiring sufficient releases from New Melones to meet specified water quality standards, but reserved jurisdiction to revise these water release requirements based on further studies. See id. at 31 (Condition 5). As noted above, the quantity of water needed to meet these requirements has been significantly higher than originally anticipated in many years. · Conditions Related to Fishery Purposes. The California DFG filed a protest to Reclamation's applications to the SWRCB related to the quality and quantity of water that should be released from New Melones for fish preservation and enhancement. See id. at 6, 11-13, 20-21. With respect to water quality, the Board imposed a requirement that Reclamation meet a dissolved oxygen ("DO") measurement and

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reserved jurisdiction to adjust this water quality requirement. Id. at 12-13. With respect to the quantity of water needed for fishery purposes, DFG recommended annual releases of 262,000 AF from New Melones for preservation and enhancement of the fishery in the Stanislaus River and an additional 50,000 AF for the same purposes in the Delta. The Board explains in its decision that DFG's "drastic revision upward" from the 98,000 AF proposed by the Bureau for such purposes was due in part to the state agency's position that "it is the ability of the spring flows to flush juvenile salmon to the ocean which determines the success of the spawning run two and one-half years later when the same salmon return to the river." Id. at 20. Despite the difference in opinion on the quantity of water needed for fish, Reclamation and DFG committed to conduct further studies. The SWRCB required releases of up to 98,000 AF for the maintenance of fish and wildlife (as proposed by Reclamation), but reserved jurisdiction to revise the releases for preservation and enhancement of fish and wildlife based upon the planned studies. See id. at 21. · The SWRCB's Reserved Jurisdiction. In addition to the reservation of jurisdiction to revise release requirements for water quality and fish purposes, D-1422 also states that, All rights and privileges under this permit, including method of diversion, method of use, and quantity of water diverted, are subject to the continuing authority of the [SWRCB] in accordance with law and in the interest of the public welfare to prevent waste, unreasonable use, unreasonable method of use, or unreasonable method of diversion of said water. Id. at 33 (Condition 13). The conditions described above reflect the fact that the quantity of water that would need to be released from New Melones to meet water quality standards in the Delta (at Vernalis) and for instream fishery needs in both the Stanislaus River and the Delta was expected to change 20

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based on future studies that were either ongoing or planned.10/ As explained above, the SWRCB has authority to change permit terms and conditions based on changed circumstances and new information. Accordingly, because Plaintiffs' contractual rights are based on and derivative of Defendant's rights to use water under its permits, Plaintiffs cannot claim a contractual expectancy that the quantity of water that must be released from New Melones to meet water quality objectives and fishery objectives would not change over time. b. Reclamation's 1988 State Permits

Reclamation reapplied for direct diversion water rights on May 3, 1982. The SWRCB's decision on these applications, which was issued following consideration of several protests to the applications and a public hearing, is contained in Decision 1616 ("D-1616"), issued in January 1988. Among other things, D-1616 included the following restrictions: · Conditions Related to Senior Water Rights. OID and SSJID again filed protests asserting that the diversions and uses proposed by Reclamation's applications would interfere with their vested rights. In response, the Board required Reclamation to negotiate an agreement with OID and SSJID. D-1616 at 31 (Condition 7). In accordance with this requirement, the parties reached an Agreement and Stipulation on August 30, 1988, see DX-41, which amended the parties' earlier agreement. · Conditions Related to Water Quality. Continuing concerns related to the impact of

10/

As set forth in the Court's pretrial opinion, after the SWRCB issued D-1422, the United States appealed the decision, arguing that the State of California lacked the authority to impose terms and conditions upon federally authorized water projects. This case was eventually appealed to the Supreme Court, which held that the CVP is subject to terms and conditions imposed by the SWRCB, except where those terms and conditions are contrary to congressional directives. California v. United States, 438 U.S. at 672, 674. 21

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consumptive use of water from New Melones on downstream water quality led to protests by several groups. The SWRCB addressed water quality by revising the water quality condition in D-1422 to preclude consumptive use diversions unless the specified TDS standards (salinity) and DO standards (related to fisheries) were met. See D-1616 at 32 (Condition 12). The Board again reserved its jurisdiction to revise instream flow requirements for water quality objectives. See id. at 33 (Condition 15). · Conditions Related to Fishery Purposes. California DFG again filed protests to Reclamation's applications based on the need for increased instream flow releases from New Melones for fishery purposes. See id. at 6-7. Reclamation resolved this protest by entering into the 1987 DFG Agreement, which the SWRCB included as a permit requirement in D-1616. See JX-17. Under the 1987 Agreement, Reclamation was required to meet instream flow requirements of between 98,300 and 302,100 AF per year as part of a long-term study to determine fishery resource protection needs. See D-1616 at 6.11/ The SWRCB again reserved jurisdiction to revise the required instream flow releases, if needed. See id. at 33 (Conditions 14-15). The Board specifically noted that including these conditions "will serve to protect public trust resources affected by the Stanislaus River flows and will allow for further Board action as appropriate when the instream flow studies are complete." Id. at 7.

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In its decision, the SWRCB noted that it had recognized the need for such studies when it had issued D-1422, and concluded that the 1987 Agreement "prescribes a reasonable method for conducting those studies as well as an agreed upon approach for making instream flow releases during the period of the study." D-1616 at 6-7. 22

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c.

The 1999 Revisions to Reclamation's State Permits

On December 29, 1999, the SWRCB issued Decision 1641 ("D-1641") as part of the Board's implementation of the 1995 Bay-Delta Plan, which sets forth the current water quality objectives for the Bay-Delta Estuary. See D-1641 at 5. D-1641 was subsequently revised in accordance with Order WR 2000-02, issued on March 15, 2000. D-1641, as revised, amended a number of permits issued to Reclamation for the CVP, including Reclamation's permits for New Melones, by revising or adding terms and conditions to those permits. These conditions require Reclamation to release water from New Melones to meet specified agricultural salinity objectives at Vernalis, water quality objectives at Vernalis (measured by a DO concentration), target flow and pulse flow objectives for fish and wildlife, and certain flow objectives set forth in the 1999 San Joaquin River Agreement ("SJRA"). See id. at 160-62. D-1641 further states that these conditions "do not mandate that the Permittee use water under these permits to meet these conditions if it uses other sources of water or other means to meet these conditions." Id. at 160 n.87. Like D-1616, D-1641 limits Reclamation's ability to deliver water to its contractors if the permit standards are not met. See id. at 162.12/ Numerous parties, including the Plaintiffs herein, filed appeals regarding D-1641. In a

12/

D-1641 provides: For the protection of water quality, no diversion is authorized for consumptive uses under this permit unless the San Joaquin River at Airport Way Bridge, Vernalis, salinity objective for agricultural beneficial uses, as specified in Table 2, attached, is met and the dissolved oxygen objectives in the Stanislaus River are met as specified in the Water Quality Control Plan for the Sacramento and San Joaquin River basins.

Id. at 162. 23

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decision issued on February 9, 2006, the California Court of Appeals for the Third District issued a lengthy dec