Stockton East Water District and Central San Joaquin Water Conservation District v. United States

In the United States Court of Federal Claims

No. 04-541L

(Filed February 28, 2013)

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STOCKTON EAST WATER * Contract damages; expectation

DISTRICT and CENTRAL SAN * damages; cost of cover;

JOAQUIN WATER CONSERVATION * reasonableness of mitigation;

DISTRICT, * foreseeability; causation of

Plaintiffs, * damages.

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v. *

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THE UNITED STATES, *

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Defendant. *

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Jennifer L. Spaletta, Stockton, CA, for plaintiff Stockton East Water District. Jeanne

M. Zolezzi and Alexis K. Galbraith, Herum Crabtree, Stockton, CA, of counsel. Roger J.

Marzulla, Washington, DC, for plaintiff Central San Joaquin Water Conservation District.

Nancie G. Marzulla, Marzulla & Marzulla, Washington, DC, of counsel.

David A. Harrington, Barbara E. Thomas, Sharon A. Snyder, Washington, DC, and

Terry M. Petrie, Denver, CO, with whom was Principal Deputy Assistant Attorney General

Stuart F. Delery, for defendant. Amy Aufdemberge, Assistant Regional Solicitor, U.S.

Department of the Interior, Sacramento, CA, and Shelly V. Randel, Office of the Solicitor,

Washington, DC, of counsel.

MEMORANDUM OPINION AND ORDER ON CLAIMS

OF STOCKTON EAST WATER DISTRICT

MILLER, Judge.

This case, before the court on remand from the United States Court of Appeals for the

Federal Circuit, involves a dispute over two water supply contracts. Plaintiffs Stockton East

Water District (“Stockton East”) and Central San Joaquin Water Conservation District

(“Central”) (collectively, “plaintiffs” or the “districts”) are water agencies organized under

the laws of California with the authority to provide water to municipal, industrial, or

agricultural users within California’s San Joaquin Valley. In 1983 plaintiffs entered into

separate contracts (the “1983 Contracts” or the “Contracts”) with the United States Bureau

of Reclamation (“Reclamation”) for the appropriation of water from the New Melones

Reservoir. Reclamation breached the Contracts in the years 1999 to 2004 when it failed to

provide specified volumes of water to plaintiffs. Stockton E. Water Dist. v. United States,

583 F.3d 1344, 1356-69 (Fed. Cir. 2009) (“Stockton III”), reh’g en banc granted in part, 638

F.3d 781 (Fed. Cir. 2011), aff’g in part, rev’g in part, and remanding, Stockton E. Water Dist.

v. United States, 75 Fed. Cl. 321 (Fed. Cl. 2007) (“Stockton I”), modified, 76 Fed. Cl. 470

(2007) (“Stockton II”). The Federal Circuit remanded the case to this court for a

determination of damages for the breaches that occurred from 1999 through 2004. Id. at

1369. The Federal Circuit also vacated this court’s dismissal of plaintiffs’ takings claim and

tasked this court with deciding plaintiffs’ takings claim on remand. Id.

In October 2011, following briefing by the parties, this court granted defendant’s

motion to dismiss plaintiffs’ takings claim. Stockton E. Water Dist. v. United States, 101

Fed. Cl. 352, 362 (2011) (“Stockton IV”). The parties proceeded with discovery regarding

contract damages, and this court held an eight-day damages trial during September 2012. On

remand the parties adopted the convention of filing separate briefs. Because both plaintiffs

presented distinct proofs and proceeded separately at trial, the court has issued separate

opinions regarding the contract damages for Stockton East and Central. The “Discussion”

section of this opinion concerns only the contract damages of Stockton East. However, the

“Facts” section of the separate opinions makes findings with respect to both districts because

the proofs addressed joint issues or otherwise overlapped.

Plaintiff Stockton East seeks: (1) expectancy damages of $18,818,509.00 or, in the

alternative, $5,398,033.00; (2) damages of $6,740,890.78 to account for its costs of

mitigation; and (3) $1,599,960.00 in consequential damages related to the “stranded costs”

for the portion of the New Melones Conveyance System (the “NMCS”) that remained unused

as a result of the breach.

FACTS 1/

The factual background and circumstances underlying the 1983 Contract were recited

in the Federal Circuit’s 2009 opinion in Stockton III, 583 F.3d 1344, and this court’s 2007

1/ The facts set forth in the “Facts” and “Discussion” sections of this opinion

constitute the court’s findings of fact pursuant to RCFC 52(a)(1). The legal standards

governing claims for contract damages sought by plaintiffs frame the context in which

relevant facts are found, so the particular findings appear in the “Discussion” section.

Rulings on mixed questions of fact and law also are set forth in the “Discussion” section.

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opinion on liability, Stockton I, 75 Fed. Cl. 321. Accordingly, this opinion discusses only

those facts necessary to resolve the damages issues that were tried.

I. The Central Valley Project and New Melones Unit

The Central Valley Project (the “CVP”) – the largest federal water management

project in the United States – is situated entirely in California and is operated by the United

States through Reclamation. Stockton III, 583 F.3d at 1349. The CVP was built to serve the

water needs of California’s Central Valley Basin and contains numerous dams, reservoirs,

power plants, canals, and other facilities. Id. Completed in 1979, the New Melones Unit of

the CVP consists of a large concrete dam on the Stanislaus River and a reservoir with a

storage capacity of 2.4 million acre-feet of water. 2/ Id.

The Flood Control Act of 1962, which modified the authorization of the New Melones

project, required Reclamation to “determine the quantity of water required to satisfy all

existing and anticipated future needs within [the Stanislaus River] [B]asin.” Pub. L. No. 87-

874, 76 Stat. 1173, 1191; see also Stockton III, 583 F.3d at 1350. In a 1980 Special Report,

Reclamation estimated that 180,000 acre-feet of water would be available annually for

agricultural, municipal, and industrial uses. Stockton III, 583 F.3d at 1350. Relying upon

the 1980 Special Report, Reclamation issued a Record of Decision (“ROD”) in 1981, which

recommended that Reclamation allocate a portion of the New Melones water supply to

Stockton East and Central. PX 15, at 00336; see also Stockton I, 75 Fed. Cl. at 337.

II. The 1983 Contracts

The damages trial provided a forum for explicating several provisions of the 1983

Contracts. 3/ Accordingly, the court summarizes the provisions relevant for determining

contract damages, citing prior undisturbed or affirmed rulings from this court’s 2007 liability

opinion and the Federal Circuit’s 2009 opinion as necessary.

1. Purposes of the Contracts

In the early 1980s, Reclamation began contract negotiations to sell New Melones

water to Stockton East and Central. Stockton III, 583 F.3d at 1350. On December 19, 1983,

Stockton East and Central signed nearly identical contracts with Reclamation for delivery of

2/ An acre-foot is the volume of water necessary to cover one acre of land with water

to a depth of one foot.

3/ The term “Contract” refers to the respective 1983 Contracts of either Stockton East

or Central.

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water from the New Melones Reservoir. PX 36; 4/ PX 37. Both contracts recite that

“[Reclamation] is constructing and operating the Central Valley Project, California for the

purpose, among others, of furnishing water for irrigation, municipal, industrial, domestic, and

other beneficial uses[.]” PX 36, at 00352; PX 37, at 00382. The Contracts also state,

“[I]nvestigations by [Reclamation] indicate that [each district] has a present and potential

need for an irrigation and a municipal and industrial water supply[,]” and “[each district] has

sought a long-term water supply from the Folsom South Canal of the Central Valley Project

which is not currently available[.]” PX 36, at 00353; PX 37, at 00383. Stockton East and

Central both entered into their respective contracts due to depleted groundwater and the need

for surface water as both an alternative source and as a means of avoiding further depletion

of groundwater. Joint Stipulation of Fact, filed Aug. 31, 2012, ¶ 2 (“Jt. Stipl.”).

2. Reclamation’s obligation to provide minimum quantities of water

Article 3 of the Contracts sets forth the formula by which Reclamation was to make

water available to Stockton East and Central. See Stockton III, 583 F.3d at 1351-52;

Stockton I, 75 Fed. Cl. at 364-66. Article 3(c) of Stockton East’s Contract provides that

“[Reclamation] shall make available and [Stockton East] shall pay for, as a minimum, such

quantities of agricultural water as specified[.]” PX 36, at 00357; see Stockton I, 75 Fed. Cl.

at 365. Central’s contract contains an identical provision. PX 37, at 00388; see Stockton I,

75 Fed. Cl. at 365. Subsection (c)(1) states that for the first five years of contract

performance, beginning with the first full year after Reclamation notified the districts that

water was available for delivery, Reclamation was to make available the amount of

agricultural water that the districts requested. PX 36, at 00357; PX 37, at 00388. For years

six through ten, Subsection (c)(2) specifies a minimum volume of agricultural water that

increases from years eight to nine. PX 36, at 00357-58; PX 37, at 00389. If the districts

requested more water than the annual minimum during this period, however, the requested

amount became the new minimum for each subsequent year until exceeded by other

contractual minimums. PX 36, at 00357-58; PX 37, at 00389. The amount of water

scheduled in the eleventh year would be the minimum amount for each remaining year of the

Contract. PX 36, at 00358; PX 37, at 00389.

Article 3(d) of Stockton East’s contract provides that “[Reclamation] shall make

available and [Stockton East] shall pay for, as a minimum, such quantities of M&I

[municipal and industrial] water as specified” and includes a table listing minimum quantities

of M&I water for each year of contract performance. PX 36, at 00358-59. Subsection (d)

of both contracts allows the districts to convert the agricultural water specified in Subsection

4/ Both Stockton East and Central denoted their exhibits as “PX.” Exhibits

introduced by Central that are cited in this opinion are numbered beginning with 600, with

the exception of PX 37.

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(c) to M&I use. PX 36, at 00358, 00360; PX 37, at 00389. These provisions, taken together,

provide the following Build-Up Schedule of annual minimum quantities of water (in acre-

feet) that Reclamation was obligated to make available from 1993 through 2004:

Year Stockton East Build-Up Central Build-Up

1993 500 0

1994 23,350 28,000

1995 23,450 28,000

1996 25,550 28,000

1997 46,400 56,000

1998 46,500 56,000

1999 47,200 56,000

2000 47,900 56,000

2001 48,600 56,000

2002 49,300 56,000

2003 50,000 56,000

2004 50,700 56,000

See Jt. Stipl. ¶ 7; Stockton II, 76 Fed. Cl. at 489; see also Stockton III, 583 F.3d at 1351-

52. 5/ Article 3 of both contracts also specifies a maximum amount of water that

5/ Shortly after this court issued its February 20, 2007 liability opinion, plaintiffs filed

a Motion to Amend or Modify Decision. See Stockton II, 76 Fed. Cl. at 471-72. In response

to defendant’s assertion that the court miscalculated the minimum volumes of water with

respect to Stockton East for the years 1999 through 2004, the court amended its February

2007 opinion to correct the computation for those years. Compare Stockton I, 75 Fed. Cl.

at 365, with Stockton II, 76 Fed. Cl. at 479-80, 489. The Federal Circuit’s opinion, however,

noted a Build-Up Schedule that was almost identical to the one appearing in the trial court’s

original opinion and therefore included incorrect minimum volumes for the six breach years.

Compare Stockton III, 583 F.3d at 1352, with Stockton II, 76 Fed. Cl. at 489. Prior to the

damages trial, the parties stipulated to the quantities specified in Stockton East’s Build-Up

Schedule for the years 1999 through 2004. Jt. Stipl. ¶ 7. The stipulated quantities for those

years differed from the quantities listed in this court’s amended liability opinion. Compare

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Reclamation would make available annually. PX 36, at 00356-60; PX 37, at 00387-90; see

also Stockton III, 583 F.3d at 1350-51.

This court found that Reclamation’s failure to provide the minimum quantities of

water listed in the Build-Up Schedule violated the requirements of Article 3, but held that

Reclamation would not be liable for breach if it had a valid excuse under the Contracts for

its non-performance. Stockton II, 76 Fed. Cl. at 489; Stockton I, 75 Fed. Cl. at 365-66. The

Federal Circuit affirmed this court’s finding that, absent a valid excuse, Reclamation would

be liable for breach of contract for its failure to deliver the minimum quantities of water

listed in the Build-Up Schedule. Stockton III, 583 F.3d at 1356-57 (“The record establishes

and the trial court found as a fact that Reclamation failed to provide the water that was

promised under the 1983 contracts for the years 1994, 1995, and 1999-2004. . . . Absent an

affirmative defense, that failure by the Government would constitute a breach of the contracts

and render the Government liable for damages for the breach.”). Reclamation’s non-

performance in the years 1999 through 2004 was not excused, and therefore Reclamation was

liable for breaching the Contracts in those years. Id. at 1364-65.

3. “Take or pay” provision

This court previously found that Article 3 not only obligated Reclamation to provide

the minimum amounts of water listed in the Build-Up Schedule, but also required each

district to purchase such amounts of water. Stockton I, 75 Fed. Cl. at 365 (referring to the

Build-Up Schedule as a “minimum purchase and supply schedule”). The Federal Circuit

affirmed that finding. Stockton III, 583 F.3d at 1351 (“Article 3 also establishes for each

year of the contract a minimum amount of water that Reclamation is obligated to make

available, and for which the Districts must pay[.]”).

At the damages trial, Reid W. Roberts, Central’s General Counsel, testified as to his

understanding that Article 3 contained a provision requiring Central to purchase the

minimum quantities of water. Transcript of Proceedings, Stockton E. Water Dist. v. United

States, No. 04-541L (Fed. Cl. Sept. 10-19, 2012) (“Tr.”), at 1643-44 (Roberts). 6/ Mr.

5/ (Cont’d from page 5.)

Jt. Stipl. ¶ 7, with Stockton II, 76 Fed. Cl. at 489. Consequently, and representing a final

consensus, the Build-Up Schedule listed above includes the stipulated quantities for the years

1999 through 2004.

6/ Parentheses attribute statements by counsel and witnesses. Statements by counsel

do not constitute testimony or evidence, although they may prove useful for setting forth

litigating positions and for explaining uncontested terms.

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Roberts also testified, however, that Reclamation had a practice of requiring Central to pay

for only the volume of water that actually was delivered during both the breach and non-

breach years:

Q. The practice in the 1999 to 2004 period was for Central to only pay for

water actually delivered from the Bureau of Reclamation, correct?

A. That’s correct[.]

....

Q. So both before and after the period 1999 to 2004, the practice between

Central and the Bureau of Reclamation was to pay for the volume of water

actually delivered under the New Melones contract.

A. That was the practice that we engaged in. Yes.

Tr. 1821, 1827 (Roberts). The evidence adduced at the damages trial therefore shows that

Reclamation did not enforce the “take or pay” provision with respect to Central. Although

no witnesses provided similar testimony regarding Reclamation’s enforcement of the “take

or pay” provision with respect to Stockton East, the latter impliedly concedes in its post-trial

brief that it paid only for the volumes of water Reclamation actually delivered. See Pl.

Stockton East’s Br. filed Nov. 9, 2012, at 8 (citing records depicting actual deliveries under

the Contract – PX 411 and PX 434 – as evidence of the volumes that Stockton East

purchased under its Contract).

4. The Article 9(a) shortage provision

Although Article 3 of the 1983 Contracts requires Reclamation to make minimum

quantities of water available to the districts annually, the Contracts also provided for certain

exceptions. One such exception, the shortage provision of Article 9(a), states that the United

States shall not be liable “if a shortage does occur in any year because of drought, or other

causes which . . . are beyond the control of the United States.” PX 36, at 00368; PX 37, at

00398; see also Stockton III, 583 F.3d at 1352, 1361-62. This court found that

Reclamation’s failure to provide the minimum amounts of water specified in the Build-Up

Schedule for the years 1994 and 1995 was excused due to the shortage provision of Article

9. Stockton I, 75 Fed. Cl. at 364. The Federal Circuit affirmed this court’s holdings with

respect to the years 1994 and 1995, Stockton III, 583 F.3d at 1363-64, 1369, explaining that

Article 9 is a force majeure provision that applies to causes “beyond the control of the United

States,” such as a drought, earthquakes, an internal failure of the dam, or other such causes,

id. at 1361-62. Citing the liability trial testimony of Edward M. Steffani, Stockton East’s

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former General Manager, and Central’s General Counsel Mr. Roberts, the Federal Circuit

further explained that when the parties executed the 1983 Contracts, both districts understood

that Article 9(a) provided for shortages caused by external circumstances, including dry

years, physical problems with the reservoir, or earthquakes. Id. at 1362.

5. The districts’ obligation to submit annual schedules to Reclamation

Article 4(a) of the 1983 Contracts requires the districts to submit annual schedules to

Reclamation “indicating the amounts of agricultural and M&I water required monthly.” PX

36, at 00361; PX 37, at 00391; see also Stockton III, 583 F.3d at 1352; Stockton I, 75 Fed.

Cl. at 362. Stockton East submitted valid schedules pursuant to the requirements of Article

4(a) from 1994-1996 and in 1998, and Central submitted a valid schedule in 1995. Stockton

I, 75 Fed. Cl. at 362. This court held, however, that the districts’ failure to submit valid

schedules in other years did not excuse Reclamation’s failure to provide the minimum

amount of water listed in the Build-Up Schedule. Stockton I, 75 Fed. Cl. at 363, 365-66.

The failure to provide valid schedules did not excuse Reclamation’s non-performance

because the districts’ payment for water and construction of conveyance facilities pursuant

to the 1983 Contracts constituted substantial performance. 7/ Id. The Federal Circuit

affirmed, and the parties did not further dispute, this court’s ruling that the districts’ failure

to submit schedules did not excuse any breach of contract by Reclamation. See Stockton III,

583 F.3d at 1352.

6. Central’s so-called “priority right” to Stockton East’s water

Article 9(b) of Stockton East’s Contract states: “During such water short years, the

quantity of water available to [Stockton East] pursuant to the terms of this contract shall be

reduced, as necessary, to meet the full needs of the Basin contractors and the needs of Central

San Joaquin Water Conservation District for its firm and interim water supply.” 8/ PX 36,

at 00368. Defendant asserts that this language granted Central a “priority right” as a third-

party beneficiary to Stockton East’s Contract and therefore entitled Central take all available

New Melones water during the six-year breach period. See Def.’s Br. filed Dec. 21, 2012

[366], at 11; see also Transcript of Proceedings, Stockton E. Water Dist. v. United States, No.

7/ The districts’ construction of water conveyance facilities is discussed in greater

detail later in this section of the opinion.

8/ Article 9(b) of Central’s Contract includes a similar provision, although it does not

specifically name Stockton East. See PX 37, at 00398 (“During such water short years, the

quantity of water available for [Central’s] firm and interim water supply pursuant to the terms

of this contract shall be reduced, as necessary, to meet the full needs of the Basin

contractors.”).

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04-541L (Fed. Cl. Jan. 4, 2013) (“Closing Arg. Tr.”), at 156-58 (Harrington). Defendant

cites two separate contracts between the districts (the “forbearance agreements”) signed in

1995 and 1996, see DX 847 and DX 864, as evidence of the “priority right” granted to

Central in Article 9(b) of Stockton East’s Contract. Closing Arg. Tr. at 157 (Harrington).

The “whereas” clauses of the forbearance agreements both state: “Stockton-East is entitled

to water under its contract [with Reclamation] only after Central has received or forgone the

water to which it is entitled[.]” DX 847, at SE17892; DX 864, at CSJW_005386. Defendant

also points to the deposition testimony of Mr. Roberts and Grant O. Thompson, Chairman

of Central’s Board of Directors, that Central had the option to take the first 80,000 acre-feet

of water that Reclamation allocated. DX 1184 (Deposition of Reid W. Roberts, May 3,

2012), at 64; DX 1185 (Deposition of Grant O. Thompson, May 22, 2012), at 98-99. Central

responds that no such “priority right” existed under the 1983 Contracts and that Messrs.

Roberts and Thompson “appear to have mistakenly believed” that such a priority right

existed. Pl. Central’s Br. filed Dec. 10, 2012, at 13.

Although the forbearance agreements and deposition testimony of Messrs. Roberts

and Thompson manifest the districts’ understanding that Central had the option to request

the first 80,000 acre-feet of New Melones water, the evidence does not probatively

demonstrate that a priority right was, in fact, granted to Central under Article 9(b) of

Stockton East’s Contract. Indeed, the language of Article 9(b) in Central’s Contract shows

that Central did not have such a priority right because the “quantity of water available for

[Central]” in water short years “shall be reduced, as necessary, to meet the full needs of the

Basin contractors.” PX 37, at 00398. Rather than granting a right to Central, Article 9(b)

in Stockton East’s contract may operate as a defense for Reclamation in the event that

Reclamation determined it was “necessary” to reduce Stockton East’s allocation to meet the

full needs of Central in a “water short” year. See PX 36, at 00368.

7. Transfers of New Melones water

The 1983 Contracts also limit the ability of each district to sell water outside of its

respective service area. Article 10 of the Contracts – entitled “Transfers or Exchanges of

Water” – provides that “[w]ater furnished to the Contractor pursuant to this contract shall not

be sold, exchanged, or otherwise disposed of for use outside the Contractor’s service area

without prior written consent from the Contracting Officer.” PX 36, at 00368; PX 37, at

00398.

In 1993 Reclamation adopted Interim Guidelines (the “Water Transfer Guidelines”)

for implementation of the water transfer provisions of § 3405(a) of the Central Valley Project

Improvement Act (the “CVPIA”). See PX 602. The Water Transfer Guidelines

acknowledge that § 3405(a) of the CVPIA authorizes transfers of New Melones water:

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Section 3405(a) authorizes all individuals or districts who receive [CVP] water

under water service or repayment contracts . . . to transfer, subject to certain

conditions, all or a portion of the water subject to such contracts to any

California water user or agency, State or Federal agency, Indian Tribe or

private non-profit organization for [CVP] purposes or any purpose recognized

as beneficial under State law.

Id. at 1. The Water Transfer Guidelines further explain that § 3405(a) is supplemental to

“Reclamation’s existing authority to allow annual transfers between Project water users,

which have historically been allowed and which are encouraged under existing contracts for

efficient and effective Project water management.” Id. Section 1 of the Water Transfer

Guidelines outlines the Guidelines’ three objectives: “to address all water transfers equitably,

to provide for a more efficient and effective use of the water supply developed by the [CVP],

and to provide greater flexibility to water users in transferring water developed by the

[CVP][.]” Id. Angela K. Slaughter, Chief of the Water Contracts and Policy Branch for

Reclamation, Sacramento, CA, testified that Reclamation has used the Water Transfer

Guidelines since 1993 in determining whether CVP contractors are permitted to transfer New

Melones water. Tr. 1709, 1718-19 (Slaughter).

Section 5 of the Water Transfer Guidelines specifies the criteria for transfers

authorized under § 3405(a). PX 602, at 3-6. Criterion H, for example, states that “[a]ll

transfers will be limited to [CVP] water that would have been consumptively used or

irretrievably lost to beneficial use during the year or years of the transfer.” Id. at 4. Ms.

Slaughter testified that Criterion H requires a transferor to show that the water previously had

been used within the transferor’s district and would be used in the transferor’s district but for

the transfer. 9/ Tr. 1721-24 (Slaughter). In addition, Criteria L and M require a transferor

to comply with federal and state law, including the National Environmental Policy Act, the

Endangered Species Act, the Fish & Wildlife Service Coordination Act, the California

Environmental Quality Act (“CEQA”), and the California Endangered Species Act. PX 602,

at 4-5; Tr. 1724-25 (Slaughter).

8. Construction of water conveyance facilities

Article 7(b) of the 1983 Contracts requires the districts to “construct and install,

without cost or expense to the United States, facilities required by [the districts] to take and

convey the water from the point or points of delivery.” PX 36, at 00364; PX 37, at 00394;

see also Stockton III, 583 F.3d at 1351; Stockton I, 75 Fed. Cl. at 363.

9/ Ms. Slaughter clarified that Criterion H is “subject to [Criterion] J,” Tr. 1724

(Slaughter), which means that “[t]ransfers between [CVP] contractors within counties,

watersheds or other areas of origin” satisfy the requirements of Crietrion H. PX 602, at 4.

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Kevin M. Kauffman, Stockton East’s General Manager since June 1993, testified at

the damages trial that Stockton East completed construction of the NMCS in 1993 at a cost

of $65 million. 10/ Tr. 70, 95 (Kauffman). Stockton East financed construction of the

NMCS with a bond offering. Tr. 98 (Kauffman). The NMCS conveys New Melones water

from the Goodwin Dam to Stockton East via the Goodwin Tunnel, Upper Farmington Canal,

a natural creek system, and the Lower Farmington Canal. See Tr. 90-91 (Kauffman)

(discussing PX 518). The water enters Stockton East through the Lower Farmington Canal

at the Copperopolis Gates. Tr. 464 (Kauffman) (discussing PX 518)

Although Central did not fund construction of the NMCS described above, see

Stockton I, 75 Fed. Cl. at 363 n.17, Central financed construction of a separate distribution

system with bonds at a total cost of $7.4 million. Tr. 1623, 1626 (Roberts) (latter discussing

PX 812). Central’s distribution system “tie[d] . . . together” a series of natural streambeds

and channels within Central’s boundaries. Tr. 1605-06 (Roberts) (discussing PX 518).

Central receives New Melones water from Reclamation at the Goodwin Dam, at which

Stockton East “wheels” the water through its conveyance system to Central’s boundary on

the western side of the Farmington dam. See Tr. 634-35 (Kauffman); Tr. 1692 (Roberts).

Central’s water then flows through the Farmington Dam and into its distribution system of

natural streambeds and creeks. Tr. 1605-06 (Roberts).

9. Water rates under the Contracts

The parties stipulated to the water rates under the 1983 Contracts for the six-year

breach period. Jt. Stipl. ¶¶ 3-5. From 1999 through 2004, Stockton East and Central were

required to pay the following rates, per acre-foot, for water purchased from Reclamation

under the 1983 Contracts:

Year Stockton East’s Water Rate Central’s Water Rate

(Ag Water)

Ag Water M&I Water

1999 $9.24 $46.75 (Jan. - Sept.) $9.24

$46.99 (Oct. - Dec.)

10/ The court’s 2007 liability opinion found that the cost of the NMCS was

approximately $60 million, according to the testimony of Stockton East’s former General

Manager from 1983-1999 Edward M. Steffani. See Stockton I, 75 Fed. Cl. at 363 n.17

(citing Transcript of Proceedings, Stockton E. Water Dist. v. United States, No. 04-541L

(Fed. Cl. Oct. 30, 2006) (“Liab. Trial Tr.”), Tr. 415). As is evident from the varying water

delivery schedules in the different stages of this litigation, the parties have refined the

evidence and, unless a significant point is invalid, the court accepts the most recent iteration.

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2000 $10.44 $43.80 (Jan. - Sept.) $10.44

$44.16 (Oct. - Dec.)

2001 $11.14 $43.04 (Jan. - Sept.) $11.14

$43.56 (Oct. - Dec.)

2002 $10.53 $40.77 (Jan. - Sept.) $10.53

$41.07 (Oct. - Dec.)

2003 $11.85 $41.87 (Jan. - Sept.) $11.85

$42.13 (Oct. - Dec.)

2004 $13.42 $44.36 (Jan. - Sept.) $13.67

$44.59 (Oct. - Dec.)

Jt. Stipl. ¶¶ 3-5.

III. Reclamation’s performance under the Contracts

1. 1988-1992

In 1988 Reclamation notified Stockton East and Central that water was available and

that the initial delivery date for purposes of the Contracts was January 1, 1989. Stockton III,

583 F.3d at 1351; Stockton I, 75 Fed. Cl. at 343. From 1989 through 1992, Stockton East

and Central did not request water from the New Melones Reservoir, as construction of the

NMCS had not been completed. See Stockton III, 583 F.3d at 1351; see also Tr. 95

(Kauffman) (stating NMCS was not completed until 1993). Reclamation did not deliver any

water to Stockton East or Central during the 1988-1992 time period. Stockton III, 583 F.3d

at 1351; Stockton I, 75 Fed. Cl. at 343.

2. 1993

In the spring of 1993, following the enactment of the CVPIA, 11/ Stockton East and

Central requested a meeting with representatives of Reclamation and the United States Fish

and Wildlife Service (“FWS”) to discuss how the CVPIA would affect the Contracts. Tr.

792 (Zolezzi). Jeanne M. Zolezzi, Stockton East’s General Counsel in 1993, testified that

the districts requested the meeting because FWS had made an initial prescription in March

11/ In 1992 Congress enacted the CVPIA, which directed Reclamation to dedicate

annually 800,000 acre-feet of water from the CVP for fish, wildlife, and habitat restoration

needs. See Stockton III, 583 F.3d at 1351. For a more detailed discussion of the CVPIA, see

id. at 1354-56; Stockton I, 75 Fed. Cl. at 338-42.

12

1993 that over 200,000 acre-feet of water from the New Melones Reservoir would be

allocated for environmental uses. See id. During a June 1993 meeting, representatives of

Reclamation and FWS confirmed that 250,000 acre-feet of New Melones water had been re-

allocated from CVP contractors to fish. Tr. 792-94 (Zolezzi); see also Tr. 1636 (Roberts).

Reclamation and FWS also told the districts that they had made a “back of an envelope”

determination that this same amount would be needed for fish in every year. Tr. 792

(Zolezzi). According to Ms. Zolezzi, Reclamation and FWS made clear that “this

prescription would continue and in only the wettest years might [the districts] see some

water.” Tr. 795 (Zolezzi); see also Tr. 1636 (Roberts) (“[A]t that meeting, Frank Dimmick,

I believe his name is and Wayne White, Dimmick was there representing the Bureau, Mr.

White was there representing Fish and Wildlife Service, spoke about what had transpired

over the past year and basically said there was not going to be any water to honor the

contracts it had to make. . . . [T]here was the passage of the CVPIA[.]”). Despite defendant’s

skepticism that Ms. Zolezzi’s recent testimony was so specific, the court found Ms. Zolezzi

credible on this point, as consistent with other testimony during the 1996 liability trial. 12/

The testimony during the liability trial almost six years earlier of both Messrs. Steffani

and Roberts was substantially the same on this issue. Compare Liab. Trial Tr. 425-26

(Steffani) (“And we were told at that meeting [which he placed in spring 1993] that we

would be getting no water. And the people in attendance were about ready to throw the

people out from the Bureau [of] Fish and Wildlife, especially after we asked Fish and

Wildlife representatives if they could document the need for the 200,000 acre-feet for fish

flow: How did you determine that you need that much water for fish in the Stanislaus River

this year? We want to know all of the science behind this. And I believe it was Jim

McKevitt from the Fish and Wildlife Service said, ‘Well, we really don’t have anything much

except what we’ve written on the back of an envelope.’”), with Liab. Trial Tr. 170 (Roberts)

(“[T]he Reclamation official whose name was Frank Dimmick . . . indicated that no water

was going to be delivered to either district that year. That all the water was going to go to

meet the requirements of the CVPIA.”).

In 1993 Stockton East submitted an oral request, on behalf of both Central and

Stockton East, for a total of 20,000 acre-feet of water, with 10,000 allocated between each

district. Stockton III, 583 F.3d at 1352; Stockton I, 75 Fed. Cl. at 343. Reclamation did not

deliver any water under the Contracts in 1993. Stockton III, 583 F.3d at 1352; Stockton I,

75 Fed. Cl. at 343.

12/ Although Ms. Zolezzi’s testimony at the liability trial referenced the 1993

meeting with Reclamation and FWS, her testimony did not focus on that meeting. See Liab.

Trial Tr. 1024-26 (Zolezzi).

13

3. 1994-1995

For 1994 Stockton East requested 75,000 acre-feet of water, and Central requested

25,000 acre-feet of water. Stockton III, 583 F.3d at 1352; Stockton I, 75 Fed. Cl. at 343-44.

In February of that year, Reclamation announced an initial forecast of “zero water supply”

for the districts based on “conditions caused by California’s fourth driest year in 85 years.”

Stockton III, 583 F.3d at 1352; Stockton I, 75 Fed. Cl. at 343-44. Reclamation later informed

the districts that no water could be delivered due to insufficient rain and snowfall conditions,

explicitly invoking the shortage provision of Article 9(a) of the Contracts. Stockton III, 583

F.3d at 1352, 1361-62; Stockton I, 75 Fed. Cl. at 343-44. Neither Stockton East nor Central

received any water under the Contracts in 1994. Stockton III, 583 F.3d at 1353; Stockton I,

75 Fed. Cl. at 344.

For 1995 Stockton East initially requested 65,000 acre-feet of water, and Central

initially requested 50,000 acre-feet. Stockton III, 583 F.3d at 1353, 1364; Stockton I, 75 Fed.

Cl. at 344. Reclamation informed the districts that a total of 37,000 acre-feet would be made

available to the districts, citing the general drought and water level conditions in the New

Melones Reservoir. Stockton III, 583 F.3d at 1353; Stockton I, 75 Fed. Cl. at 344.

Following a dispute regarding the districts’ water conservation plans, their water requests for

the year were reduced. Stockton III, 583 F.3d at 1353, 1364; Stockton I, 75 Fed. Cl. at 344.

Reclamation was unable to meet the districts’ requests for water in 1995. Stockton III, 583

F.3d at 1353.

The Federal Circuit affirmed this court’s ruling that Reclamation’s failure to provide

the minimum volumes of water in 1994 and 1995 was excused because the shortage

provision of Article 9(a) applied to those years. Stockton III, 583 F.3d at 1363-64.

4. 1996

For 1996 Stockton East initially requested 32,400 acre-feet, and Central requested

40,000 acre-feet. Stockton III, 583 F.3d at 1353; Stockton I, 75 Fed. Cl. at 345. Reclamation

announced an allocation of 49,000 acre-feet to the districts in 1996 and made available all

of the water that Stockton East initially requested for that year. Stockton I, 75 Fed. Cl. at

345. Stockton East later significantly reduced its requested amount to 4,000 acre-feet, citing

“the wet ’95-’96 winter, and because of the unusually large amount of storage in New Hogan

Reservoir, [Stockton East’s] primary source.” Id.; see also Stockton III, 583 F.3d at 1353.

14

In 1996 Reclamation delivered 12,969 acre-feet to Stockton East, PX 434, 13/ and 17,508

acre-feet to Central, Stockton III, 583 F.3d at 1353; Stockton I, 75 Fed. Cl. at 345.

5. 1997-1998

In 1997 the parties completed and agreed to an Interim Plan of Operations (the

“IPO”), which allocated water to the districts based upon annual storage and inflow at the

New Melones Reservoir. Stockton III, 583 F.3d at 1353. Stockton East and Central agreed

to the IPO as a short-term modification to the Contracts for 1997 and 1998. Id. In each of

those years, the districts were allocated a combined total of 50,000 acre-feet, and

Reclamation’s water deliveries complied with the terms of the IPO. Id.

6. 1999-2004

Although the IPO was intended to be operational for 1997 and 1998, Reclamation

continued to use the IPO formulas to allocate water to the districts from 1999 through 2004.

Id. The following chart summarizes the volumes of water (in acre-feet) that the districts

requested and that Reclamation allocated to the districts from 1999 through 2004:

Year Amount Requested by Amount Requested by Amount Allocated

Stockton East Central (Total)

1999 23,000 None 60,000

2000 24,000 None 90,000

2001 24,000 None 34,000

2002 3,500 12,000 15,500

13/ The columns labeled “USBR M&I” and “USBR AGR” in PX 434 show the

amount of water that Reclamation delivered to Stockton East under the Contract for the years

1995 to 2011. Tr. 126 (Kauffman). The summary chart depicted in PX 434 is based upon

monthly reports that Stockton East and Central submitted to Reclamation depicting the daily

flows to both districts. See Tr. 121 (Kauffman). The amounts listed in PX 434 differ slightly

from the delivery quantities recited in this court’s liability opinion and the Federal Circuit’s

opinion. Compare PX 434, with Stockton III, 583 F.3d at 1352-53, and Stockton I, 75 Fed.

Cl. at 347. Because the discrepancies are immaterial and both parties cite PX 434 as

evidence of Reclamation’s deliveries to Stockton East, the court accepts PX 434 as an

accurate representation of the quantities of water that Reclamation delivered to Stockton

East.

15

2003 10,000 10,000 10,000

(combined with Central) (combined with

Stockton East)

2004 None 25,000 15,000 (Central only)

Id.; Stockton I, 75 Fed. Cl. at 347. 14/ Reclamation delivered the followings volumes of

water to Stockton East and Central under the 1983 Contracts from 1999 through 2004:

Year Amount Delivered to Stockton East Amount Delivered to Central

(Ag Water)

M&I Water Ag Water Total

1999 23,078 5,112 28,190 33,786

2000 2,939 4,254 7,193 27,759

2001 4,671 2,359 7,030 25,750

2002 2,066 1,422 3,488 10,503

2003 1,260 1,135 2,395 9,845

2004 0 1,486 1,486 13,605

14/ At closing argument defendant pointed to PX 551 as evidence that Stockton East

and Central failed to take large volumes of water that Reclamation allocated to the districts

in 1999 and 2000. Closing Arg. Tr. 153 (Harrington) (discussing PX 551); see also Tr. 91,

156 (Harrington). Figure 2-13 in PX 551, Stockton East’s Water Supply Plan dated

December 2008, presents a bar graph showing unused CVP allocations in two of the breach

years – 1999 and 2000. See PX 551, at 2-13. Although PX 551 shows an “East Side CVP

Allocation” of 90,000 acre-feet in 1999, this court previously found that Reclamation

allocated a total of 60,000 acre-feet to Central and Stockton East in 1999. Compare PX 551,

at 2-13, with Stockton I, 75 Fed. Cl. at 347; see also Stockton III, 583 F.3d at 1353.

Defendant has not adequately accounted for this material discrepancy and has not shown that

the unused “East Side CVP Allocation” illustrated in PX 551 was allocated only to Central

and Stockton East. See, e.g., Tr. 2124-25 (Kauffman). The court therefore finds that its

2007 liability opinion accurately reflects the amount of water allocated by Reclamation to

Central and Stockton East.

16

See PX 434; Jt. Stipl. ¶ 6. 15/

Reclamation’s failure to provide the minimum quantities of water listed in the Build-

Up Schedule violated the requirements of Article 3 of the Contracts. Stockton III, 583 F.3d

at 1364; Stockton II, 76 Fed. Cl. at 489. In contrast to the years 1994 and 1995,

Reclamation’s non-performance during the 1999-2004 time period was not excused by the

shortage provision of Article 9(a), and Reclamation therefore was liable for breaching the

Contracts in the years 1999 through 2004. Stockton III, 583 F.3d at 1364, 1369.

IV. Stockton East’s 1997 Transfer Agreement

In 1993 Stockton East began pursuing a water transfer agreement with Oakdale

Irrigation District (“OID”) and South San Joaquin Irrigation District (“SSJID”). Tr. 1791-92

(Zolezzi). OID and SSJID are two of the largest water rights holders on the Stanislaus River

with rights to the first 600,000 acre-feet of annual inflow to the New Melones Reservoir. Tr.

891-93 (O’Laughlin); see also Tr. 791 (Zolezzi). The City of Stockton (the “City”),

California Water Service Company (“Cal Water”), the County of San Joaquin, and Central

15/ As discussed supra note 13, the columns labeled “USBR M&I” and “USBR

AGR” in PX 434 show the volumes of water that Reclamation delivered to Stockton East.

See PX 434. Central and Reclamation stipulated to the amounts delivered to Central for the

years 2001 through 2004. Jt. Stipl. ¶ 6. For deliveries to Central in 1999 and 2000, the

amounts listed in the chart above reflect the findings of fact from this court’s liability opinion

and the Federal Circuit’s opinion. See Stockton III, 583 F.3d at 1353; Stockton I, 75 Fed.

Cl. at 347.

Defendant relies on Central’s interrogatory responses for the amounts delivered to

Central in 1999 and 2000. See DX 1099 at 4. Central’s interrogatory response for 2000,

however, lists a delivery amount of 28,153 acre-feet – approximately 400 acre-feet greater

than the amount listed in the prior opinions. Mr. Roberts also testified at the damages trial

that 28,153 acre-feet was the correct amount of water that Central purchased from

Reclamation in 2000. See Tr. 1661-62, 1665-66 (Roberts). Raising a hearsay objection and

citing Fed. R. Evid. 403, counsel for Central objected to defense counsel’s questioning Mr.

Roberts about Central’s interrogatory responses. Tr. 1662-63 (Marzulla). Although this

objection is due to be overruled and Mr. Roberts agreed with defendant’s figures, this

discrepancy is immaterial in view of the court’s ultimate findings on Central’s expectancy

damages.

17

joined Stockton East in negotiating directly with OID and SSJID for transfer water. 16/ Tr.

795 (Zolezzi).

On April 1, 1997, Stockton East entered into a ten-year water transfer agreement with

OID and SSJID (the “1997 Transfer Agreement”). See PX 450. The City, Lincoln Village

Maintenance District, and Colonial Heights Maintenance District also signed the 1997

Transfer Agreement, which referred to those entities, in addition to Stockton East, as the

“Purchasers.” See PX 450, at 1. The term of the 1997 Transfer Agreement was for ten years,

beginning with the date on which water was first delivered. PX 450, at 3. Paragraph 5(a)

required OID and SSJID to deliver water under every year of the agreement. Id. For years

in which the forecast of inflow to the New Melones Reservoir equaled 500,000 acre-feet or

more, OID and SSJID were required to deliver 30,000 acre-feet. Id. In drier years the

delivery amount was reduced to 12,500 acre-feet and 8,000 acre-feet. Id.

The 1997 Transfer Agreement was a “take or pay” contract requiring Stockton East

to purchase the water regardless of the amount used. Id.; Tr. 801-02 (Zolezzi). For years in

which the forecast of inflow to the New Melones Reservoir equaled 450,000 acre-feet or

more, the price of the water was $55 per acre-foot. PX 450, at 3. In drier years, when the

delivery amount was reduced to 8,000 acre-feet, the price of the water was $90 per acre-foot.

Id. The price of the water was to be adjusted annually based upon changes to the Consumer

Price Index. Id. at 3-4.

In 1999 Stockton East began receiving water from OID and SSJID under the 1997

Transfer Agreement. Tr. 807 (Zolezzi). Because deliveries were based upon the “water

year” – October 1 through September 30 – Stockton East received deliveries from October

1999 through September 2009. PX 454, at 2-7; see also PX 450, at 3. Utilizing a summary

of Stockton East’s monthly accounting records prepared by Stockton East’s Finance Director,

Elpedio V. Jamosmos, see PX 454, at 2-7; Tr. at 1098 (Jamosmos), Stockton East’s damages

expert, Everett P. Harry, compiled the following summary of Stockton East’s purchases from

OID and SSJID under the Transfer Agreement:

Year Amount of Water Purchased Amount Paid

(acre-feet)

1999 (Oct. - Dec.) 4,115.20 $226,355.50

2000 33,352.80 $1,848,369.17

2001 25,479.00 $1,456,975.67

16/ The substance of these negotiations and Stockton East’s purposes in seeking an

agreement with OID and SSJID are included in the “Discussion” section of this opinion.

18

2002 29,815.00 $1,746,144.14

2003 30,000.00 $1,786,440.35

2004 30,146.50 $1,834,402.62

2005 30,120.01 $1,884,236.23

2006 30,000.00 $1,948,500.00

2007 30,000.00 $2,017,550.00

2008 30,000.00 $2,064,850.00

2009 (Jan. - Sept.) 25,000.00 $1,791,750.00

PX 403A; Tr. 1269-70, 1272-73 (Harry). 17/ Stockton East used the NMCS to convey the

water it purchased from OID and SSJID. Tr. 130 (Kauffman).

PROCEDURAL HISTORY

A trial court takes note when its appeals court encourages an expedited resolution on

remand. See Stockton E. Water Dist., 638 F.3d at 785. The facts are that this case sat for

over eleven years in federal district court; after transfer to the United States Court of Federal

Claims and the revival of proceedings in April 2004, it was bifurcated at the parties’ request

and thereafter litigated on liability until May 2007; and it was on appeal and rehearing until

April 2011 when it was returned for trial on damages. See generally Stockton IV, 101 Fed.

Cl. at 354-55 (setting forth chronological history to date).

This case began in 1993, when plaintiffs filed a complaint in the United States District

Court for the Eastern District of California and enumerated five untitled claims for relief.

“As characterized by the district court, these claims were (1) impairment of ‘vested rights

under . . . water contracts[] in violation of the Fifth Amendment due process clause’; (2)

violation of the National Environmental Policy Act for failure to prepare an environmental

impact statement; (3) violation of the CVPIA, § 3410; (4) arbitrary and capricious action by

the Government; and (5) violation of the Fifth Amendment’s takings clause.” Stockton IV,

17/ Mr. Harry testified to the calculations in PX 403. Stockton East later realized,

however, that PX 403 included transactions that were not part of the 1997 Transfer

Agreement with OID and SSJID. See Tr. 1311-13 (Harry). The parties stipulated to an

amended exhibit – PX 403A – that excluded purchases of water unrelated to the 1997

Transfer Agreement. See PX 403A; Tr. 1807 (Spaletta).

19

101 Fed. Cl. at 354 (dismissing takings claim) (quoting Westlands Water Dist. v. United

States, No. CV-F-93-5327 (E.D. Cal. Feb. 11, 1994) (consolidated cases)).

On January 29, 2004, the district court transferred the takings claim to the Court of

Federal Claims. Id. at 355 (citing Stockton E. Water Dist. v. United States, Nos. CV-F-93-

5896, CV-F-96-5738 (E.D. Cal. Jan. 30, 2004) (order transferring cases) (consolidated

cases)). This court received the transferred action on April 1, 2004, and plaintiffs filed their

Amended Complaint on April 20, 2004, seeking relief for a taking and breach of contract.

See Amended Compl. filed Apr. 20, 2004. Defendant filed a motion to dismiss on June 21,

2004, inter alia, seeking to dismiss the breach of contract claim, which this court denied by

order entered on September 3, 2004. See Stockton E. Water Dist. v. United States, 62 Fed.

Cl. 379 (2004).

After the parties filed a Joint Status Report on October 22, 2004, requesting the court

to bifurcate the case, with liability being tried first, and damages being tried thereafter only

if liability was found, an order entered on October 27, 2004, bifurcated the liability and

damages phases of the case. In 2005 the parties filed cross-motions for summary judgment

regarding the breach of contract claim. The court granted in part defendant’s summary

judgment motion, denied plaintiffs’ partial summary judgment motion, and identified the

issues for trial. See Stockton E. Water Dist. v. United States, 70 Fed. Cl. 515, 536 (2006).

Trial on liability was held October 23, 2006, through November 2, 2006. The court

awarded judgment for defendant on the breach of contract claims for 1993 through 2004 and

dismissed the takings claim. See Stockton I, 75 Fed. Cl. at 376 (determining liability and

entering judgment on the merits). The court subsequently granted in part and denied in part

plaintiffs’ motion to alter or amend the judgment, Stockton II, 76 Fed. Cl. at 482, and denied

plaintiffs’ motion for reconsideration, Stockton E. Water Dist. v. United States, 76 Fed. Cl.

497, 512 (2007). Plaintiffs appealed to the United States Court of Appeals for the Federal

Circuit, which affirmed this court’s judgment of non-liability as to plaintiffs’ breach of

contract claims for 1994 and 1995, reversed this court’s judgment of non-liability as to

plaintiffs’ breach of contract claims for 1999 through 2004, and vacated this court’s dismissal

of plaintiffs’ takings claim. Stockton III, 583 F.3d 1344, reh’g en banc granted in part, aff’d,

638 F.3d 781. Plaintiffs did not appeal this court’s judgment of non-liability as to the

breaches alleged in 1993, 1996, 1997, and 1998. See id. at 583 F.3d at 1354. This court was

tasked with deciding plaintiffs’ takings claim and determining damages for the breaches that

occurred from 1999 through 2004. Id. at 1369.

Since April 11, 2011, this matter has been before the court on remand from the

Federal Circuit. On July 19, 2011, defendant moved to dismiss the complaint for lack of

jurisdiction, invoking the United States Supreme Court’s decision in United States v. Tohono

O’Odham Nation, 131 S. Ct. 1723 (2011). Tohono construed 28 U.S.C. § 1500 (2006), to

20

foreclose the Court of Federal Claims from hearing any claim based on the same operative

facts underlying a claim encompassed in a pending, prior-filed action in federal district court.

See Tohono, 131 S. Ct. at 1731. Following briefing by the parties, plaintiffs filed a Motion

for Voluntary Dismissal of Their Claim for Taking Without Just Compensation. Defendant

responded to plaintiffs’ motion, arguing that jurisdiction—a threshold issue—must be

resolved before the court could entertain plaintiffs’ motion for voluntary dismissal. On

October 31, 2011, this court dismissed plaintiffs’ takings claim, but denied defendant’s

motion to dismiss as to plaintiffs’ breach of contract claim. Stockton IV, 101 Fed. Cl. at 362.

On June 18, 2012, defendant moved for summary judgment with respect to the claims

of both Stockton East and Central. Plaintiffs filed cross-motions for summary judgment,

which the court denied because adjudication of the cross-motions did not comport with the

deadline for filing dispositive motions set by an earlier order. Order entered July 10, 2012,

¶ 2. However, all arguments made in support of plaintiffs’ cross-motions were considered

as complementing their respective briefs in opposition to summary judgment. Id. On July

19, 2012, the court granted defendant’s motion with respect to Central only insofar as Central

was seeking a “market value” measure of damages representing the measure of damages for

a takings claim. Order entered July 1, 2012 [260]. The court otherwise denied defendant’s

motions with respect to both plaintiffs without prejudice to any party raising issues that are

appropriate for ruling on motions in limine. Id.; Order entered July 1, 2012 [259].

After the close of discovery, the parties submitted a total of twenty-three motions in

limine and other pre-trial motions. On August 24, 2012, the court held a pretrial conference

and entered a lengthy epistle discussing each of the motions. 18/ See Order entered Aug.

24, 2012 (the “pretrial order”). The pretrial order noted that the “appeals court affirmed this

court’s findings on the scope of the breach, i.e., failure to deliver a minimum quantity of

water for each of the breach years.” Id., ¶ 12. Accordingly, the court ruled that the “non-

breaching buyer’s recovery is limited by that minimum quantity and whatever damages can

be attributed to the failure to deliver up to that quantity.” Id., ¶ 5.

18/ In its pretrial order, the court deferred ruling on some arguments raised in the

motions in limine. For example, in response to defendant’s motion in limine arguing that

Stockton East’s stranded costs claim was tantamount to a claim for interest, the court noted

that trial will “provide the appropriate context for ascertaining whether the incurred financing

costs are overhead or interest.” Order entered Aug. 24, 2012, at 18-19. The court explained,

however, that “Stockton East is aware that it can recover overhead in the form of fixed costs

and will present its claim as incurred costs that it could not recover due to the breach.” Id.

The rulings in the pretrial order therefore do not supersede this court’s rulings at trial or in

this opinion.

21

The damages trial was held in Sacramento, CA, from September 10, 2012, through

September 19, 2012. 19/ At the conclusion of Stockton East’s case-in-chief, defendant

moved for judgment on partial findings, pursuant to RCFC 52(c), with respect to Stockton

East’s damages claims for “groundwater recharge” and “stranded costs.” Tr. 1332-33

(Harrington). The court declined to grant the motion, noting that it was in the interest of

justice to have a full record, especially in light of the lengthy history of this litigation. Tr.

1377-79. Post-trial briefing was completed on December 21, 2012, and closing argument

were held on January 4, 2013.

19/ Although the court has considered the testimony of every witness, discussion of

each is not necessary to render a comprehensive decision. Stockton East proceeded first at

trial and presented the following witnesses: (1) Kevin M. Kauffman, General Manager of

Stockton East; (2) Mark J. Madison, former Director of Utilities of the City of Stockton; (3)

Jeanne M. Zolezzi, former General Counsel of Stockton East; (4) Francis S. Ferraro, Vice-

President of California Water Service Company; (5) Timothy O’Laughlin, counsel for

Oakdale Irrigation District; (6) Clay J. Landry, Managing Director of WestWater Research

and an expert in western water markets; (7) Elpedio V. Jamosmos, Finance Director of

Stockton East; (8) Elaine Vastis Conti, Manager of Raftelis Financial Consultants and an

expert in identifying and allocating the costs of water conveyance facilities; and (9) Everett

P. Harry, Partner of Harry Torchiana LLP and an expert in the analysis and computation of

breach of contract damages.

Central then presented the following witnesses: (1) Timothy J. Durbin, an expert in

the hydrology of the Eastern San Joaquin Groundwater Basin; (2) Reid W. Roberts, General

Counsel of Central; (3) Angela K. Slaughter, Chief of the Water Contracts and Policy Branch

of Reclamation’s Sacramento, CA office; (4) Grant O. Thompson, Chairman of Central’s

Board of Directors; and (5) Dr. Rodney T. Smith, President of Stratecon, Inc., and an expert

in California water markets.

Defendant presented the following witnesses: (1) Steven P. Emrick, General Counsel

for South San Joaquin Irrigation District; (2) Mr. Kauffman; (3) Ali Shahroody, a water

research engineer for Stetson Engineers, Inc. and an expert in water resources and

agricultural engineering; and (4) Dr. David L. Sunding, Professor in the College of Natural

Resources at the University of California, Berkeley and an expert in natural resource

economics, economic damages, agricultural economics, and the economics of water

resources.

22

DISCUSSION

I. Expectancy damages

1. Standard for awarding expectancy damages

Plaintiff Stockton East seeks expectancy damages of $18,818,509.00 or, in the

alternative, $5,398,033.00. Pl. Stockton East’s Br. filed Nov. 9, 2012, at 30. The purpose

of expectancy damages is to make the non-breaching party whole by providing it with the

benefits it expected to receive from the contract had the breach not occurred. Fifth Third

Bank v. United States, 518 F.3d 1368, 1374 (Fed. Cir. 2008) (citing Glendale Fed. Bank,

FSB v. United States, 239 F.3d 1374, 1379 (Fed. Cir. 2001)). The Federal Circuit has

cautioned, however, that “‘[a] non-breaching party is [generally] not entitled, through the

award of damages, to achieve a position superior to the one it would reasonably have

occupied had the breach not occurred.’” Kan. Gas and Electric Co. v. United States, 685

F.3d 1361, 1366 (Fed. Cir. 2012) (quoting LaSalle Talman Bank, F.S.B. v. United States, 317

F.3d 1363, 1371 (Fed. Cir. 2003) (first alteration in original)); see also Old Stone Corp. v.

United States, 450 F.3d 1360, 1378 (Fed. Cir. 2006) (“[T]he non-breaching party should not

be placed in a better position through the award of damages than if there had been no

breach.” (citations and internal quotation marks omitted)). Although expectancy damages

can include lost profits, they are not limited to lost profits. Fifth Third Bank, 518 F.3d at

1374 (citing Glendale Fed. Bank, 239 F.3d at 1379).

A party is entitled to expectancy damages if it can make three showings. Id. First,

the damages must have been reasonably foreseeable at the time the parties entered into the

contract. Id. (citing Cal. Fed. Bank v. United States, 395 F.3d 1263, 1267 (Fed. Cir. 2005))

Second, the damages must be caused by the breach. Id. (citing Cal. Fed. Bank, 395 F.3d at

1267). Third, the measure of damages must be reasonably certain. Id. (citing Cal. Fed.

Bank, 395 F.3d at 1267).

Foreseeability, causation, and proof of damages to a reasonable certainty are all issues

of fact to be determined by the trial court. Id. at 1375 (citing Home Sav. of Am., FSB v.

United States, 399 F.3d 1341, 1347 (Fed. Cir. 2005)); Bluebonnet Sav. Bank, F.S.B. v.

United States, 266 F.3d 1348, 1355-57 (Fed. Cir. 2001) (“Bluebonnet III”) (explaining that

“[f]oreseeability is a question of fact reviewed for clear error[,]” “[c]ausation is also a

question of fact reviewed under the clear error standard[,]” and reviewing a finding of

reasonable certainty under the clear error standard). The burdens of proving causation,

foreseeability, and proof of damages lie with the claimant. See Anchor Sav. Bank, FSB v.

United States, 597 F.3d 1356, 1362 (Fed. Cir. 2010) (discussing burden in context of lost

profits claim); Precision Pine & Timber, Inc. v. United States, 596 F.3d 817, 833 (Fed. Cir.

2010) (“[T]he party seeking damages has the burden of proving them with ‘reasonable

23

certainty.’”); Yankee Atomic Electric Co. v. United States, 536 F.3d 1268, 1273 (Fed. Cir.

2008) (discussing plaintiff’s burden to prove causation).

1) Foreseeability

As the Federal Circuit has held, the party seeking expectancy damages “must show

that the claimed damages were within the realm of reasonable foreseeability at the time the

contract was entered into[.]” Fifth Third Bank, 518 F.3d at 1374 (citing Cal. Fed. Bank, 395

F.3d at 1267). Actual foresight is not required, and the “specific loss in question” need not

be “within the contemplation of the parties at the time of contracting.” Anchor Sav. Bank,

597 F.3d at 1364. Reasonable foreseeability requires “‘merely that the injury actually

suffered must be one of a kind that the defendant had reason to foresee and of an amount that

is not beyond the bounds of reasonable prediction.’” Id. (quoting 11 Joseph M. Perillo,

Corbin on Contracts § 56.7, at 108 (rev. ed. 2005)). The breaching party will not be liable,

however, “‘for a particular type of loss that was so unusual as not to be foreseeable.’” Id.

(quoting E. Allen Farnsworth, Farnsworth on Contracts § 12.14, at 262 (3d ed. 2004)).

2) Causation

A plaintiff seeking expectancy damages also must establish that the breach caused the

damages. Fifth Third Bank, 518 F.3d at 1374. In Winstar cases and Spent Nuclear Fuel

(“SNF”) cases, the Court of Federal Claims has applied two different standards in

determining causation of damages: the “but-for” test and the “substantial factor” test. See

Citizens Fed. Bank v. United States, 474 F.3d 1314, 1318-20 (Fed. Cir. 2007). In the “but-

for” test, the plaintiff must establish that the damages would not have occurred “but-for” the

breach. Cal. Fed. Bank, 395 F.3d at 1267. However, the breach need not be “the sole factor

or sole cause” of the damages, and therefore “[t]he existence of other factors operating in

confluence with the breach will not necessarily preclude recovery based on the breach.” Id.

at 1267-68 (affirming trial court’s decision to apply “substantial factor” test) (citing E. Alan

Farnsworth, Farnsworth on Contracts § 12.1, at 150-51 (3d ed. 2004)). Under the

“substantial factor” standard, in contrast, the plaintiff must show that the breach is a

“substantial causal factor” in the damages. See Ind. Mich. Power Co. v. United States, 422

F.3d 1369, 1374 (Fed. Cir. 2005) (citing Energy Capital Corp. v. United States, 302 F.3d

1314, 1320 (Fed. Cir. 2002)).

The Federal Circuit has explained that the “selection of an appropriate causation

standard depends upon the facts of the particular case and lies largely within the trial court’s

discretion.” Citizens Fed. Bank, 474 F.3d at 1318. Although the Federal Circuit has

affirmed trial court decisions applying the “substantial factor” test in Winstar and SNF cases,

the Federal Circuit has stated a preference for the “but-for” test. See Yankee Atomic, 536

F.3d at 1272 (explaining that the “but-for” test is the “traditional” and “preferred” standard

24

for determining causation). Accordingly, this court will apply the “but-for” standard of

causation to Stockton East’s claim for damages.

Regardless of the causation standard applied, the Federal Circuit has held that “‘it is

incumbent upon [a plaintiff seeking expectancy damages] to establish a plausible ‘but-for’

world.’” S. Nuclear Operating Co. v. United States, 637 F.3d 1297, 1304 (Fed. Cir. 2011)

(quoting Yankee Atomic, 536 F.3d at 1273); see also Kan. Gas and Electric, 685 F.3d at 1371

(citing Yankee Atomic, 536 F.3d at 1273; Bluebonnet Sav. Bank, FSB v. United States, 67

Fed. Cl. 231, 238 (2005) (“Bluebonnet VI”)); Energy Nw. v. United States, 641 F.3d 1300,

1308 (Fed. Cir. 2011) (“[T]he burden of proving the non-breach world . . . lie[s] with [the

plaintiff].”); Yankee Atomic, 536 F.3d at 1273 (quoting Bluebonnet VI, 67 Fed. Cl. at 238).

In other words, the plaintiff bears the burden of demonstrating “what might have been”

absent the breach. Glendale Fed. Bank, 239 F.3d at 1380.

Plaintiffs have been denied expectancy damages where the Court of Federal Claims

“could not accurately assess [plaintiffs’] damages” because there was insufficient evidence

to “perform the necessary comparison between the breach and non-breach worlds[.]” Kan.

Gas and Electric, 685 F.3d at 1371; Yankee Atomic, 536 F.3d at 1273 (“Without record

evidence about [plaintiffs’] condition with full Government performance, the Court of

Federal Claims could not perform the necessary comparison between the breach and non-

breach worlds and thus could not accurately assess the [plaintiffs’] damages.” (citations

omitted)). In Kansas Gas and Electric, for example, an SNF plaintiff could not obtain

damages for a spent fuel storage study because the record showed that the plaintiff would

have been required to pursue a similar study regardless of the breach, and the plaintiff did

not provide record evidence comparing the costs of the studies in the breach and non-breach

worlds. 685 F.3d at 1371. In Bluebonnet Savings Bank, a Winstar case, the Federal Circuit

similarly rejected an expectancy damages claim based on a failed but-for model. Bluebonnet

III, 266 F.3d at 1358; see also Bluebonnet IV, 67 Fed. Cl. at 238 (explaining that “the Federal

Circuit recognized that plaintiffs were responsible for establishing the ‘but-for’ world”). The

plaintiffs in Bluebonnet Savings Bank had contended that, in the “but-for” world, they would

have obtained capital infusions through loans at a “speculative” interest rate and that they

would have repaid their debt promptly. Bluebonnet III, 266 F.3d at 1358. However, the

plaintiffs presented no evidence “that anyone would have loaned [plaintiffs] the funds[,]” and

the only witness who testified as to the interest rate predicated the availability of the rate on

contingencies for which no evidence was introduced. Id.

A proper calculation of expectancy damages accounts for avoided costs – costs that

a plaintiff would have incurred in the non-breach world but has not incurred in the breach

world. See S. Nuclear Operating Co., 637 F.3d at 1303-04 (citations omitted); Yankee

Atomic, 536 F.3d at 1273 (discussing plaintiff’s failure to account for avoided costs);

Bluebonnet Sav. Bank, F.S.B. v. United States, 339 F.3d 1341, 1345 (Fed. Cir. 2003)

25

(“Bluebonnet V”). The plaintiff’s recovery must be reduced by the amount of avoided costs,

“[i]n order to ensure that the [damages award] . . . does not represent an overstatement of the

loss fairly attributable to the breach.” Bluebonnet V, 339 F.3d at 1345; see also Carolina

Power & Light Co. v. United States, 573 F.3d 1271, 1277 (Fed. Cir. 2009) (affirming trial

court finding that plaintiff did not avoid certain costs). Although the plaintiff bears the

burden of persuasion with respect to avoided costs, the plaintiff’s burden to “incorporate

those saved costs into its formulation of a plausible but-for world” arises only when the

defendant first “move[s] forward by pointing out the costs it believes the plaintiff avoided

because of the breach.” S. Nuclear Operating Co., 637 F.3d at 1304 (remanding to the trial

court and instructing that “[s]hould the government fail to timely point out specific

shortcomings in the plaintiff’s causation proof on the issue of saved costs and, in appropriate

circumstances, produce supporting evidence, the court is entitled to treat the issue as

waived”).

3) Proof of damages to a reasonable certainty

A party seeking expectancy damages also must prove its damages to a reasonable

certainty. Fifth Third Bank, 518 F.3d at 1374; Cal. Fed. Bank, 395 F.3d at 1267. However,

“where responsibility for damage is clear, it not essential that the amount thereof be

ascertainable with absolute exactness or mathematical precision[.]” Bluebonnet III, 266 F.3d

at 1355; see also San Carlos Irrigation & Drainage Dist. v. United States, 111 F.3d 1557,

1563 (Fed. Cir. 1997) (citing Elec. & Missile Facilities, Inc. v. United States, 416 F.2d 1345,

1358 (Ct. Cl. 1969)). When damages are not proved with mathematical precision, “the

court’s duty is to ‘make a fair and reasonable approximation of the damages.’” Bluebonnet

III, 266 F.3d at 1356-57 (quoting Ace-Fed. Reporters, Inc. v. Barram, 226 F.3d 1329, 1333

(Fed. Cir. 2000)). “If ‘a reasonable probability of damage can be clearly established,

uncertainty as to the amount will not preclude recovery[.]’” Fifth Third Bank, 518 F.3d at

1374-75 (quoting Cal. Fed. Bank, 395 F.3d 1267). Recovery of speculative damages,

however, is precluded. Ind. Mich. Power Co., 422 F.3d at 1373 (citing San Carlos Irrigation

& Drainage Dist., 111 F.3d at 1563).

2. The parties’ arguments

1) Additional M&I and agricultural water use but-for the breach

The evidence and the parties’ arguments focused largely on establishing the “but-for”

world, i.e., what would have happened absent Reclamation’s breach. A primary component

of that scenario is the amount of water that Stockton East would have taken in the breach

years if Reclamation had made full allocations available; if Stockton East would not have

taken water that was unavailable due to Reclamation’s breach, it follows that it suffered no

damages as a result of Reclamation’s breach.

26

To support its claim for expectancy damages, Stockton East offered evidence that it

would have purchased an additional 82,955 acre-feet of water under the 1983 Contract.

Stockton East’s estimate of additional water demand in the but-for world is based upon: (1)

the testimony of its General Manager Mr. Kauffman, including Mr. Kauffman’s opinions as

a lay witness within the scope of Fed. R. Evid. 701; 20/ (2) testimony from representatives

of its Urban Contractors – Mark J. Madison, former Director of Municipal Utilities for the

City, and Francis S. Ferraro, Vice-President of Cal Water; 21/ and (3) evidence of water

deliveries and infrastructure improvements that actually occurred in the years following the

1999-2004 breach period. See Pl. Stockton East’s Br. filed Nov. 9, 2012, at 23-24.

Mr. Kauffman prepared a spreadsheet – PX 563 – showing that, if Reclamation had

not breached the Contract, Stockton East would have requested during the breach years an

additional 62,908 acre-feet of water for M&I purposes and an additional 20,047 acre-feet of

water for agricultural and groundwater recharge purposes. See PX 563; Tr. 358-59, 372-77

(Kauffman) (discussing PX 563). The spreadsheet indicates that Stockton East would have

requested the following additional acre-feet of water during the breach period:

Year M&I Water Ag Water and Total Water

Groundwater (M&I + Ag /

Recharge Recharge)

1999 3,152 5,122 8,274

2000 3,139 4,217 7,356

20/ Mr. Kauffman provided lay testimony and was not qualified as an expert witness

under Fed. R. Evid. 702. Prior to trial defendant filed a motion in limine to exclude or limit

the testimony of ten experts, including Mr. Kauffman. The court found that, although Mr.

Kauffman was a long-time, experienced employee, he did not have the background to qualify

as an expert witness. Order entered Aug. 24, 2012, at 16-17. Mr. Kauffman testified as a

fact witness and offered lay testimony pursuant to Fed. R. Evid. 701.

21/ Cal Water and the City each have contracts with Stockton East (the “Second

Amended Contract”) to purchase M&I water from Stockton East. Tr. 175-76 (Madison); Tr.

862 (Ferraro); see DX 807 (the Second Amended Contract). The City and Cal Water are two

of Stockton East’s largest Urban Contractors, collectively providing roughly 98% of the

Stockton metropolitan area with M&I water. See Tr. 860-61 (Ferraro). The City and Cal

Water are each entitled to slightly less than half of the M&I water available from Stockton

East. See Tr. 212 (Madison). Stockton East’s other Urban Contractors are Lincoln Village

Maintenance District and Colonial Heights Maintenance District – two political divisions

governed by San Joaquin County. See DX 807, at 00429.

27

2001 12,760 5,287 18,047

2002 11,492 152 11,644

2003 16,746 1,144 17,890

2004 15,619 4,125 19,744

Total 62,908 20,047 82,955

(1999-2004)

PX 563 (columns M, N, and O).

Stockton East’s ability to take 62,908 acre-feet of M&I water in the but-for world was

contingent upon certain enhancements that Stockton East would have made to its Drinking

Water Treatment Plant (the “DWTP”) and the Peters Pipeline. See Tr. 363-71 (Kauffman)

(discussing columns H-K in PX 563). Mr. Kauffman prepared a demonstrative exhibit – PX

435 – comparing the actual implementation of the enhancements with the enhancements that

would have occurred had Reclamation not breached the Contract. Tr 231-32 (Kauffman);

see PX 435. According to Mr. Kauffman, if Reclamation had not breached the Contract,

Stockton East would have received requests from its Urban Contractors to accelerate several

planned infrastructure improvements to the DWTP and thus would have hastened its ability

to treat New Melones water at the DWTP for sale to the Urban Contractors. Tr. 238-43, 363-

71 (Kauffman) (discussing PX 563). The first group of enhancements – involving the

completion of a study required by the California Department of Public Health (“CDPH”) and

improvements to the DWTP low-lift pump station – would have been implemented in 1999

and therefore would have increased the rated capacity of the DWTP from 40 million gallons

per day (“mgd”) to 45 mgd beginning in 1999. 22/ Tr. 238-39, 363-64 (Kauffman). In

actuality, Stockton East completed the CDPH study in 2000 and the improvements to the

low-lift pump station in 2002. Tr. 233-35 (Kauffman).

The second series of enhancements to the DWTP – labeled “Enhancement #3 and #4”

in column J of PX 563 – consisted of improvements to the DWTP’s high-service pump

station and sedimentation basin. Tr. 240-41, 367-68 (Kauffman); see also PX 563. Mr.

Kauffman testified that these enhancements and an additional CDPH study would have been

completed in 2000 and therefore would have increased the rated capacity of the DWTP from

45 mgd to 60 mgd beginning in 2000. Tr. 240-41, 367-68 (Kauffman); see also PX 435; PX

22/ In order to operate the DWTP at a higher capacity, Stockton East often was

obligated to obtain approval from the CDPH by completing a study demonstrating that it

could meet drinking water standards while operating the DWTP at a higher capacity. Tr.

234-35 (Kauffman).

28

563. In the real world, Stockton East did not complete the high-service pump station and

sedimentation basin improvements until 2007, nor did Stockton East obtain approval to

operate the DWTP at a capacity of 60 mgd until 2008, upon completion of additional CDPH

studies. Tr. 236-37 (Kauffman); see also PX 435. Mr. Kauffman’s analysis also shows that

an additional CDPH study would have been completed in 2002, thereby increasing the rated

capacity of the DWTP to 65 mgd in 2002. See PX 435; PX 563. This study actually was

completed in 2010 – the year that Stockton East began operating the DWTP at its current

capacity of 65 mgd. Tr. 237 (Kauffman). Due to the acceleration of these enhancements in

the but-for world, Mr. Kauffman estimated that Stockton East would have been able to treat

an additional 55,386 acre-feet of water from 1999-2004. 23/ Tr. 371 (Kauffman) (discussing

column K in PX 563).

Mr. Kauffman’s estimate of Stockton East’s M&I water use in the but-for world also

depended on the acceleration of an additional infrastructure project – the extension to the

Peters Pipeline. Tr. 239-40, 366 (Kauffman). Upon reaching Stockton East’s boundary at

the Copperopolis Gates, New Melones water flows through the Lower Farmington Canal for

roughly a mile and a half before entering the Peters Pipeline. Tr. 464-65, 467-68

(Kauffman). The water then travels westerly and southwesterly through the Peters Pipeline

before reaching the DWTP. Tr. 465 (Kauffman). Prior to 2006, however, only a portion of

the Peters Pipeline had been constructed, and New Melones water therefore had to flow

through a different pipeline – the Belotta Pipeline – for six miles before reaching the DWTP.

Tr. 465-66, 569 (Kauffman). It was Mr. Kauffman’s opinion – as General Manager of

Stockton East – that if Reclamation had not breached the Contract, Stockton East would have

received requests from its Urban Contractors to accelerate the Peters Pipeline project, and

Stockton East therefore would have completed the six-mile Peters Pipeline extension in 2000

– six years prior to its actual completion. Tr. 239-40, 366-70 (Kauffman). With a completed

Peters Pipeline, Stockton East would have been able to deliver additional water to the DWTP

and thus could have treated water at a rate of 60 mgd in 2001 and 65 mgd from 2002-2004.

Tr. 240-41, 366-68 (Kauffman).

Mr. Kauffman also estimated that Stockton East’s agricultural customers would have

used an additional 20,047 acre-feet of New Melones water during the breach period if

23/ Mr. Kauffman explained that approximately 14% of the M&I water purchased

from Reclamation at the Goodwin Tunnel constituted “system losses” resulting from

evaporation and percolation in the NMCS and DWTP. Tr. 361-62, 371, 621-25 (Kauffman).

Accordingly, Mr. Kauffman estimated that Stockton East would have needed to request

62,908 acre-feet of water from Reclamation to treat 55,386 acre-feet of water for its Urban

Contractors. Tr. 621-22 (Kauffman) (discussing PX 563).

29

Reclamation had not breached the Contract. 24/ Tr. 372-73 (Kauffman) (discussing column

N in PX 563); see also PX 563. Stockton East operates an “incentive program” that assists

farmers in financing the capital improvements necessary to convert from groundwater to

surface water use. Tr. 379 (Kauffman). As General Manager of Stockton East, Mr.

Kauffman works with agricultural customers who are interested in participating in the

program and converting to surface water. Tr. 378-79 (Kauffman). Mr. Kauffman testified

that during the six-year breach period farmers within Stockton East expressed little interest

in converting to surface water because Stockton East’s surface water was unreliable. Tr.

379-80 (Kauffman). However, when Stockton East began receiving a full allocation of New

Melones water under the Contract in 2005, agricultural customers began expressing more

interest in converting to surface water. Tr. 379-80 (Kauffman). Mr. Kauffman stated that,

based on a comparison of 2010 agricultural use and agricultural use during the breach years,

his staff and he estimated how many more agricultural properties may have hooked up to the

system during the breach years and therefore would have taken New Melones water but for

the breach. Tr. 372-73 (Kauffman). According to Mr. Kauffman, from 1999-2004 the

highest volume of agricultural use – 5,287 acre-feet – would have occurred in the year 2001.

Tr. 376-77 (Kauffman) (discussing column N in PX 563). In that year 40,000 acres of

farmland in Stockton East were irrigated with groundwater. Tr. 377 (Kauffman). To provide

agricultural users with 5,287 acre-feet of New Melones surface water in 2001, Stockton East

would have needed to convert 800 to 1,500 acres from groundwater to surface water use. Tr.

376-77 (Kauffman). Mr. Kauffman related that, since the breach period, Stockton East

actually exceeded that level of conversion. Tr. 377 (Kauffman).

In addition to Mr. Kauffman’s testimony, Stockton East supported its claim for

expectancy damages with the testimony of representatives of two Urban Contractors.

Messrs. Madison and Ferraro – representatives of the City and Cal Water, respectively – each

testified that their respective entities utilized a conjunctive-use program to meet water needs,

meaning that both surface water and groundwater were used. Tr. 175 (Madison); Tr. 860-64

(Ferraro). During the breach years, both the City and Cal Water had a policy or practice of

maximizing surface water use and reducing groundwater pumping to improve the conditions

of the groundwater basin. Tr. 174-75, 216-17 (Madison); Tr. 863-65 (Ferraro). Given the

Urban Contractors’ preference for using surface water, Messrs. Madison and Ferraro testified

that, if Reclamation had made additional water available to Stockton East from 1999-2004,

the Urban Contractors would have used that surface water to meet their customers’ M&I

water needs. Tr. 176-77, 215 (Madison); Tr. 868-69 (Ferraro). Stockton East also relied

upon Messrs. Madison and Ferraro in an attempt to corroborate Mr. Kauffman’s testimony

24/ Mr. Kauffman testified that his estimate of agricultural use in the but-for world

accounted for “system losses” ranging from 10 to 30% because agricultural system losses

“var[y] depending on how close the customer is to the conveyance system.” Tr. 375-76

(Kauffman).

30

that Stockton East would have received requests from the Urban Contractors to accelerate

planned infrastructure improvements. Pl. Stockton East’s Br. filed Dec. 10, 2012, at 5-6.

Stockton East argues that Mr. Kauffman’s analysis is supported by evidence of

infrastructure and water deliveries that actually occurred in the years following the 1999-

2004 breach period. See Pl. Stockton East’s Br. filed Nov. 9, 2012, at 23-24. According to

Mr. Kauffman, 2005 was the first year that Stockton East received a full allocation of water

under the 1983 Contract. Tr. 380 (Kauffman). Mr. Kauffman further explained that, “[o]nce

Reclamation starting making the water more reliable from this contract the urban contractors

became believers” in Stockton East’s planned infrastructure improvements, Tr. 239

(Kauffman), and Stockton East consequently completed the Peters Pipeline extension in 2006

and improvements to DWTP’s high-service pump station and sedimentation basin in 2007,

Tr. 235-36 (Kauffman); see also Pl. Stockton East’s Br. filed Nov. 9, 2012, at 10.

Stockton East also relies on post-breach evidence to corroborate Mr. Kauffman’s

analysis of agricultural use in the but-for world. See id. at 10. Mr. Kauffman’s analysis

shows that from 1999-2004 the highest volume of agricultural use – 5,287 acre-feet – would

have occurred in the year 2001. See PX 563. To provide agricultural users with 5,287 acre-

feet of New Melones surface water in 2001, Stockton East would have needed to convert a

maximum of 1,500 acres from groundwater to surface water use. Tr. 376-77 (Kauffman).

Mr. Kauffman testified that from 2005 to 2010 the actual conversion of farmland within

Stockton East exceeded that amount. Tr. 377-78 (Kauffman). He further indicated that those

conversions were facilitated by the increased reliability of New Melones water immediately

following the breach period. Tr. 379-80 (Kauffman).

Defendant responds that Stockton East’s claim for expectancy damages fails because

it is based on an implausible but-for model. Def.’s Br. filed Nov. 29, 2012 [362], at 31-37.

Defendant offers three principal criticisms of Stockton East’s analysis of the but-for world.

First, defendant charges that “[c]onceptually, Stockton East’s but-for model is an exercise

in hindsight untethered to any specific facts in the record.” Id. at 32. Defendant emphasizes

that Mr. Kauffman developed the timeline of accelerated infrastructure improvements, see

PX 435, without reviewing contemporaneous records from the breach period or consulting

with the Urban Contractors, see Def.’s Br. filed Nov. 29, 2012 [362], at 32 (citing Tr. 539-42

(Kauffman)). Citing Mr. Kauffman’s testimony regarding his methodology, defendant

argues that Mr. Kauffman simply “reasoned backward” to develop a scenario under which

Stockton East would have been able to take deliveries of the minimum quantities listed in the

Build-Up Schedule. Id. at 32-33.

Second, defendant contends that Mr. Kauffman’s but-for model lacks factual support

and is contradicted by evidence of record. Id. at 33-34. Defendant points out, for example,

that the DWTP was already operating at the 45 mgd level in 1999 and 2000, as evidenced by

31

data included in an August 2000 permit application that Stockton East submitted to CDPH.

See id. at 33 (citing PX 525). Defendant also emphasizes that Stockton East’s timeline of

accelerated infrastructure improvements fails to explain how Stockton East would have

rapidly obtained $7 million to construct the Peters Pipeline extension. Id. at 34. Defendant

additionally takes issue with Stockton East’s estimate of agricultural demand in the but-for

world, contending that Stockton East provided no probative evidence that farmers would

have converted to surface water beginning in 1999 if Reclamation began complying with the

Build-Up Schedule in that year. Id. at 35-36.

Third, defendant argues that Stockton East’s model of the but-for world is

fundamentally flawed because it fails to account for avoided costs. Id. at 36-37. Citing

Stockton East’s financial statements, defendant shows that Stockton East incurs operating

expenses associated with the DWTP to transport, treat, and distribute the water. See id. at

37 (citing PX 500, at 32). Because Stockton East’s but-for model makes no reference to

these costs that Stockton East avoided due to Reclamation’s breach, defendant argues that

Stockton East’s but-for model cannot serve as the basis for an expectancy damages award.

Id.

2) Stockton East’s calculation of expectancy damages

Stockton East proposes two alternative methods for calculating its expectancy

damages related to the 82,955 acre-feet of water that it would have requested but for the

breach. Stockton East’s preferred approach, which the court will refer to as the “groundwater

recharge” method, aims to measure the value of the groundwater recharge that Stockton East

lost due to the breach. See Pl. Stockton East’s Br. filed Nov. 9, 2012, at 27-28. Part of

Stockton East’s mission is to address the overdraft of the Eastern San Joaquin Groundwater

Basin by engaging in activities that facilitate groundwater recharge. See Tr. 382-83

(Kauffman); PX 5, at 00004-5, 00009. There are two general ways for Stockton East to

accomplish groundwater recharge: in-lieu recharge and direct recharge. Tr. 383 (Kauffman).

In-lieu recharge occurs when users substitute groundwater for surface water. Id. For

example, in-lieu recharge takes place when a farmer converts to surface water or when an

Urban Contractor uses surface water instead of pumping groundwater. Id. In contrast, direct

recharge can occur through flooding a field, basin, or pond with surface water. Tr. 384

(Kauffman). The surface water then seeps into the ground and ultimately reaches the

groundwater basin. Tr. 638 (Kauffman).

Mr. Kauffman testified that, if Stockton East had not breached the Contract, Stockton

East would have used the additional 82,955 acre-feet that it would have requested to

effectuate in-lieu recharge. Tr. 393 (Kauffman). Because it is now operating its facilities

at maximum capacity for in-lieu recharge, Tr. 399-400 (Kauffman), Stockton East advances

the argument that it lost the opportunity to attain the in-lieu recharge that it would have

32

achieved during the 1999-2004 breach period. Tr. 444-45 (Spaletta). Stockton East therefore

proposes that the court measure the value of this lost opportunity based upon the cost of

achieving direct recharge over the next three years. See Pl. Stockton East’s Br. filed Nov.

9, 2012, at 28; Tr. 1286-91 (Harry).

Stockton East relies on the testimony of Messrs. Kauffman and Harry to compute its

expectancy damages under the groundwater recharge method. Mr. Kauffman testified that

Stockton East is currently pursuing a direct recharge project (the “north site facility”), which

would be able to recharge 26,500 acre-feet of water annually. Tr. 400-01 (Kauffman).

Stockton East has estimated that it would cost over $8 million to construct the facility, in

addition to $5.1 million to purchase the 230 acres on which the facility would be located. Tr.

401-09 (Kauffman); see also PX 440; PX 442, at SEWD 123742-D. Based on Mr.

Kauffman’s testimony, Mr. Harry calculated that the cost of accomplishing direct recharge

of 69,919 acre-feet 25/ at the north site facility would be $272.64 per acre-foot. Tr. 1286

(Harry). This sum includes a cost of $236.42 to acquire each acre-foot of water over the next

three years, in addition to $36.22 per acre-foot representing the costs of constructing,

operating, and maintaining the north site facility. Tr. 1286-89 (Harry); see also PX 554, at

2. Accordingly, Mr. Harry calculates that Stockton East’s expectancy damages under the

groundwater recharge method are $18,818,509.00. Tr. 1294 (Harry); see also PX 554, at 1.

In its post-trial brief, Stockton East offered an alternative method for calculating its

expectancy damages – the “proxy cost of cover” approach. 26/ See Pl. Stockton East’s Br.

filed Nov. 9, 2012, at 25-27. Under this method Stockton East computes its expectancy

damages for each breach year by (1) multiplying the amount of water that it would have

requested from Reclamation but for the breach by the spot-market price of water 27/ and then

(2) subtracting from that amount the price that it paid to Reclamation. See id., Ex. B. Based

25/ Mr. Harry based his analysis on Mr. Kauffman’s estimate that Stockton East

would have requested an additional 82,955 acre-feet of water but for the breach. See Tr.

1292-93 (Harry); PX 554, at 5. Assuming that 15.72% of the water would have been system

losses, Mr. Harry concluded that 69,919 acre-feet of groundwater would not have been

pumped but for the breach. Tr. 1292-93 (Harry).

26/ Both in the pretrial order, see Order entered Aug. 24, 2012, at 3, and during trial,

see Tr. 419-20, 1373-74, the court suggested that Stockton East’s counsel should explore the

cost of cover as an alternative method for potentially valuing the water that Stockton East

claims would have been requested but for the breach.

27/ The spot-market price refers to the price of buying water on a short-term basis,

usually for a one-year term. See Tr. 936-37 (Landry); Tr. 1993-94 (Smith).

33

on the “proxy cost of cover” method, Stockton East alternatively seeks expectancy damages

of $5,398,033.00. 28/ See id. at 30.

Defendant responds that neither of Stockton East’s expectancy damages calculations

is founded upon recognized principles of contract law. Def.’s Br. filed Nov. 29, 2012 [362],

at 38. Defendant asserts that “Stockton East’s claim for $18.8 million in ‘damages’ for the

projected cost to construct a groundwater recharge facility eight years after the breach ended,

and to supply ‘market rate’ water to that facility for three years, is unprecedented and

unsound.” Id. at 41. Defendant mounts three challenges to Stockton East’s groundwater

recharge calculation. First, citing California property law, defendant points out that the

overlying property owners – not Stockton East – own the groundwater in the East San

Joaquin Groundwater Basin, with the result that Stockton East cannot recover the alleged

damages incurred by those overlying property owners. Id. at 41-42. Second, defendant

contends that Stockton East has not incurred any monetary loss of its own as a result of

groundwater pumping by farmers and the Urban Contractors during the breach period. Id.

at 42-43. Third, defendant emphasizes that Stockton East’s groundwater recharge calculation

is speculative and unsound because it is based upon the construction of a direct recharge

facility that has not been built and may never be built. Id. at 43-44.

Regarding Stockton East’s “proxy cost of cover” method of calculating of damages,

defendant argues that the use of a spot-market price is inappropriate because Stockton East

sold water to its customers at a price far below the spot-market price. Id. at 46. Moreover,

defendant contends that Stockton East’s “proxy cost of cover” calculation cannot be based

upon the premise that Stockton East would have sold any New Melones water outside the

district but for the breach. Id. at 47-48. Defendant adds that Stockton East did not identify

any potential buyer for its water and notes that Article 10 of the Contract limited Stockton

East’s ability to sell water outside its service area. See id.

28/ Three witnesses testified regarding the spot-market price of water from the

Stanislaus River and San Joaquin River Basin during the six-year breach period. Timothy

O’Laughlin – an attorney representing OID – testified that the average market price of water

from 1999-2004 was $100 per acre-foot. Tr. 899-900 (O’Laughlin). Mr. Landry – an expert

on water markets – testified that the spot market price of water in the San Joaquin River

Basin during the six-year breach period ranged from a low of $61.25 per acre-foot to a high

of $136.67 per acre-foot. Tr. 940-42 (Landry); PX 426, at 6. Dr. Rodney T. Smith – an

expert on California water markets – testified that the spot-market price of water in the San

Joaquin River Basin ranged from a low of $60 per acre-foot to a high of $135 per acre-foot.

Tr. 2010-18 (Smith); see PX 622, Att. 3. Plaintiff provided separate “proxy cost of cover”

computations based on the spot-market prices provided by each of these witnesses. See Pl.

Stockton East’s Br. filed Nov. 9, 2012, Ex. B. The average of the three computations is

$5,398,033.00. See id. at 25.

34

3. Analysis of Stockton East’s proof of expectancy damages

1) Stockton East’s analysis of M&I water use in the “but-for” world

Stockton East’s model of the but-for world rests primarily on Mr. Kauffman’s

testimony and the two key exhibits he developed: (1) a spreadsheet – PX 563 – showing M&I

and agricultural water use but for the breach, and (2) a timeline – PX 435 – depicting the

acceleration of planned infrastructure improvements but for the breach. During direct

examination Mr. Kauffman testified that he and his staff developed the but-for model by

comparing evidence of M&I and agricultural water use in 2010 and the six-year breach

period. 29/ Tr. 358, 372-73 (Kauffman). Mr. Kauffman explained that the 2010 data were

relevant because “it [sic] was the most current data we had at the time when we did the

analysis, and it included the expansion of the treatment plant and the fact that our urban, or

our agricultural customers were beginning to see the value of the water coming from the CVP

contract through the [NMCS].” Tr. 358-59 (Kauffman). In other words, Stockton East relied

upon evidence of post-breach water deliveries and infrastructure improvements as a proxy

of what would have occurred from 1999 to 2004 had Reclamation not breached the Contract.

This analysis ultimately failed to account for other factors that impeded Stockton East’s

ability to accelerate its planned infrastructure improvements during the breach period and

therefore take additional M&I water from 1999 to 2004. More fundamental were the

problems with PX 563 itself.

Defendant’s objections to PX 563 were manifold. See Tr. 369-70, 380-81

(Harrington). The court admitted the exhibit as the product of Mr. Kauffman’s analysis, i.e.,

without it his testimony would have been unmoored and incomprehensible. Tr. 381-82. The

lengthy examinations of Mr. Kauffman concerning PX 563 by both Stockton East and

defendant attest to its importance to Stockton East’s case on expectancy damages. See, e.g.,

Tr. 359-82, 393, 527-29, 533-39, 580-81 (Kauffman). It strikes the court as odd were

Stockton East permitted to trumpet an exhibit as embodying an analysis tantamount to that

sponsored by an expert when the proponent witness did not qualify as an expert under Fed.

R. Evid. 702. PX 563 has no inherent evidentiary value apart from Mr. Kauffman’s

29/ On cross-examination defense counsel impeached Mr. Kauffman with deposition

testimony in which Mr. Kauffman admitted that he created PX 435 without personally relying

on any documents and that the timeline was based upon his conversations with Jeanette

Thomas, Stockton East’s Assistant General Manager. Tr. 541-42 (Kauffman). Mr.

Kauffman explained, however, that Ms. Thomas was “leading the effort” to develop the but-

for analysis. Tr. 540 (Kauffman). The court therefore finds that Mr. Kauffman’s but-for

model was developed through conversations with Ms. Thomas, although Ms. Thomas and

Stockton East staff likely relied upon historical and 2010 water use data to perform the

analysis.

35

testimony, and the court finds that testimony did not withstand defendant’s cross-examination

as to its calculated or derived elements, as will be discussed.

Stockton East bases its estimate of M&I water use in the but-for world upon its ability

to accelerate its planned infrastructure improvements during the breach period. See PX 563

(columns H-K). The six-mile extension of the Peters Pipeline, in particular, is critical to Mr.

Kauffman’s analysis. Prior to the actual construction of the extension in 2006, New Melones

water needed to flow through the Belotta Pipeline before reaching the DWTP. Tr. 465-66,

569 (Kauffman). Mr. Kauffman admitted during cross-examination, however, that the

Belotta Pipeline had a delivery capacity of 48 mgd and therefore functioned as the

“bottleneck” in Stockton East’s water conveyance system. Tr. 568-69 (Kauffman). Without

the six-mile extension to the Peters Pipeline, Stockton East could not deliver more water

from the New Melones Reservoir to the DWTP. Tr. 198-99 (Madison); Tr. 569 (Kauffman).

The parties do not dispute this fact. See Pl. Stockton East’s Br. filed Dec. 10, 2012, at 15.

Mr. Kauffman testified that, but for the breach, Stockton East would have completed

the Peters Pipeline extension in 2000 – six years earlier than its actual completion – and thus

would have been able to deliver additional water to the DWTP from 2000-2004. Tr. 239-41,

366 (Kauffman). Crucially, Mr. Kauffman’s testimony did not demonstrate that Stockton

East plausibly could have obtained the financing to construct the extension in 2000. The

Peters Pipeline extension cost over $7 million to construct, see Tr. 570 (Kauffman), and

Stockton East admittedly did not have enough money in 2000 to accelerate its planned

improvements to the DWTP and Peters Pipeline extension, Tr. 562-63 (Kauffman). Stockton

East submitted a grant proposal to the State of California in December 2001 – the first year

in which such a grant proposal could be submitted – seeking $3.5 million to fund the Peters

Pipeline extension. Tr. 570-71 (Kauffman). The State denied the grant application, and

Stockton East resubmitted the application in June 2003. Id. Ten months later – in April 2004

– the State notified Stockton East that its application for $3.5 million in funding had been

approved, but that the funding might not be available from the State in fiscal years 2004 and

2005 due to the State’s budgetary problems. Tr. 571-72 (Kauffman). Once the grant

application had been approved, Stockton East’s Urban Contractors agreed in July 2004 to

fund the remaining $3.5 million. Tr. 572 (Kauffman).

Mr. Kauffman explained that Stockton East did not have the funding in 2000 for the

Peters Pipeline extension because the Urban Contractors “saw the New Melones supply as

unreliable and didn’t want to fund these [infrastructure] projects.” Tr. 563-64 (Kauffman).

Indeed, Mr. Madison testified that “[i]f additional water was made available [under the 1983

Contract] I believe that the [C]ity would have been much more inclined to work

cooperatively with Stockton East to advance the construction of the Peters pipeline.” Tr. 210

(Madison). Mr. Ferraro echoed that “Cal Water would have required more certainty

associated with the availability of water from [Reclamation], and because of the history of

36

[Reclamation] not providing the water under the terms of the contractual agreement with

Stockton East, we didn’t have that certainty.” Tr. 875-76 (Ferraro). Mr. Ferraro added, “[I]f

we’re going to be paying for additional facilities, and [Reclamation] is not delivering the

water to utilize those facilities, then that’s a waste of money.” Tr. 871 (Ferraro).

While this testimony suggests that the City and Cal Water may have agreed to finance

the Peters Pipeline extension at an earlier date if additional New Melones water had been

available, it does not plausibly demonstrate that $7 million in financing was forthcoming or

that the Peters Pipeline would have been built in 2000 absent the breach. As Mr. Madison

testified, the water supply from the 1983 Contract was just one factor affecting the City’s

ability to finance construction of the Peters Pipeline extension. When Stockton East first

proposed the Peters Pipeline project in 1999, the City was concerned about the cost of the

project and therefore considered a more economical option, which involved adding slip lining

to the Belotta Pipeline to improve its ability to transport water at high pressures. Tr. 182-83,

199 (Madison). In fact, the City responded to Stockton East’s Peters Pipeline proposal with

a letter stating that the City “ha[d] serious concerns regarding the proposed financing plan”

for the project. 30/ DX 929, at SEWD042688-D.

During that time period, the City also had other priorities, including its plans for the

South Stockton Aqueduct – a buried pipeline that conveys treated surface water from the

DWTP to the south part of the City. Tr. 185, 201-02 (Madison). Before construction of the

South Stockton Aqueduct in 2006, the south part of the City was not served with any surface

water and had to rely solely on groundwater. Tr. 185 (Madison); DX 1000. Accordingly,

the City prioritized that project over enhancements to the DWTP. Tr. 203 (Madison); see

also DX 1000. Despite the long-standing importance of the South Stockton Aqueduct to the

City, the City’s monetary concerns prevented the aqueduct from being constructed until 2006.

Tr. 201-02 (Madison). The City was not able to begin construction of the aqueduct until

2004 when it obtained $6 million in federal funding for the $10 million project. Id. Given

the financial obstacles faced by the City in constructing the South Stockton Aqueduct – a

project that it prioritized over the DWTP – it is not plausible that the City would have agreed

to finance construction of the Peters Pipeline extension as early as 1999. 31/

30/ Mr. Kauffman noted his understanding that this specific language referred to

Reclamation’s breach of the Contract. Tr. 575 (Kauffman). Nonetheless, Mr. Kauffman

admitted that the letter made no specific reference to Reclamation. Tr. 576 (Kauffman).

31/ Defendant argues that the City withheld funding for the Peters Pipeline in 1999,

in part, because the City and Stockton East were embroiled in a lawsuit. See Def.’s Br. filed

Nov. 29, 2012 [362], at 11. Citing Mr. Kauffman’s trial testimony, defendant claims that the

City “later threatened to sue the district if it went forward with the project.” See id. (citing

Tr. 552 (Kauffman)). The cited testimony, however, does not state explicitly that any lawsuit

37

A lack of funding was not the only factor affecting construction of the Peters Pipeline.

Mr. Kauffman explained during cross-examination that construction of a new pipeline

involves acquisition of a right-of-way, compliance with regulatory and environmental

procedures, and consultation with Stockton East’s Urban Contractors. Tr. 544-45

(Kauffman). Indeed, the City’s November 1999 response to Stockton East’s Peters Pipeline

proposal identifies several “[p]otentially [s]ignificant” land use, planning, and environmental

concerns with the proposed project:

According to the Project Description, this project will require the acquisition

of 3,650 feet of thirty-foot wide easements by [Stockton East]. As major water

transmission pipelines inherently impose impacts and restrictions on

landowner’s usage of property (maintenance roads, inspection/access points,

cathodic protection equipment, etc.), this project will have a potentially

significant impact on those affected landowners and their property.

Consequently, in accordance with CEQA requirements, an Environmental

Impact Report must be prepared detailing these impacts and any proposed

mitigation measures.

....

The Initial Study [of the Peters Pipeline project] fails to identify and assess

other project alternatives that may satisfy the stated project needs without

resulting in the adverse environmental impacts as described . . . above.

DX 929, at SEWD042687 to 688-D. Noting that “[t]hese alternatives may be less costly

[and] less impacting to the environment,” the City’s November 1999 letter recommended that

the alternatives “should be fully evaluated, together with the input of all affected parties,

31/ (Cont’d from page 37.)

between the City and Stockton East was related to the pipeline project. See Tr. 552

(Kauffman). Three witnesses – Messrs. Madison, Kauffman, and Ferraro – testified

regarding a lawsuit that the Urban Contractors filed against Stockton East in the 1998-2001

time period. All three witnesses merely testified that the lawsuit involved the way Stockton

East was spending the Urban Contractors’ money. See Tr. 199-200, 221 (Madison); Tr. 575-

76 (Kauffman); Tr. 871 (Ferraro). Moreover, Mr. Ferraro directly denied that the lawsuit

was connected with the Peters Pipeline. See Tr. 871 (Ferraro). The nature of the lawsuit was

not further developed through testimony or documentary evidence, so the court is not in a

position to make a finding on the impact of the lawsuit on Stockton East’s ability to finance

its planned infrastructure improvements.

38

prior to the adoption of any environmental document for the project.” Id. at SEWD042688-

D.

The record reflects that such regulatory, environmental, and other factors unrelated

to financing likely would have prevented Stockton East from constructing the Peters Pipeline

six years earlier. Despite obtaining $3.5 million in financing from the Urban Contractors in

July 2004, Stockton East did not award a contract to begin construction of the pipeline until

February 2005. Tr. 572 (Kauffman). Due to problems that occurred during construction,

work on the project still was continuing in December 2006 – almost two-and-one-half years

after Stockton East secured financing from the Urban Contractors. 32/ Tr. 572-73

(Kauffman). Even if Reclamation had not breached the Contract in 1999 and Stockton had

obtained full funding from the Urban Contractors later that year, Stockton East has not met

its burden of producing evidence that it plausibly would have completed the required

regulatory and environmental process and construction of the pipeline at a faster pace. In

fact, when cross-examined, Mr. Kauffman stated that Reclamation’s breach did not cause

Stockton East to defer its plans for the Peters Pipeline project:

Q. Stockton East did not defer the Peters pipeline in 1999 at all, did it? It

continued pushing forward with that project.

A. We pushed hard for that project from whoever would provide the funding.

That’s correct.

Q. So Stockton East didn’t defer the Peters pipeline because of the breach at

all. It continued pushing forward with the project.

A. Absolutely we pushed forward with that project. We pushed forward with all of the

projects.

Tr. 551-52 (Kauffman). Mr. Kauffman confirmed that, when Reclamation announced the

water allocation in the first part of 1999 and began breaching the Contract, Stockton East’s

Board of Directors took no action to delay or defer the planned infrastructure improvements

described in Mr. Kauffman’s but-for model. Tr. 549-51 (Kauffman).

Stockton East argues that Mr. Kauffman’s analysis of accelerated infrastructure

improvements is plausible because it is “truth-tested against what actually happened at the

32/ Mr. Kauffman testified earlier that it took “about one year” to actually construct

the Peters Pipeline. Tr. 240 (Kauffman). His testimony on cross-examination, however,

clarified that construction was ongoing almost two years after Stockton East awarded a

construction contract. Tr. 572-73 (Kauffman).

39

district post-breach.” Pl. Stockton East’s Br. filed Dec. 10, 2012, at 14. In other words,

Stockton East contends that Mr. Kauffman’s but-for model is reasonable because it comports

with infrastructure improvements that actually occurred after the breach period when

Reclamation began making more water available. See Pl. Stockton East’s Br. filed Nov. 9,

2012, at 24; Tr. 239-40 (Kauffman). The evidence adduced at trial, however, does not

indicate that the Urban Contractors began supporting the infrastructure improvements due

to a perceived or actual increased reliability or availability of New Melones water.

According to Mr. Kauffman, 2005 was the first year that Stockton East received a full

allocation of water under the 1983 Contract. Tr. 380 (Kauffman). Yet, the Urban

Contractors agreed to finance the Peters Pipeline during the prior year – in July 2004 – when

Reclamation was still breaching the Contract. See Tr. 572 (Kauffman). This fact

undermines Stockton East’s attempt to draw a causal link between Reclamation’s

performance under the Contract and the Urban Contractors’ eventual decision to finance the

Peters Pipeline.

In fact, Mr. Madison testified that the City’s eventual support of the Peters Pipeline

was not driven by the availability of New Melones water. According to Mr. Madison, the

City decided to support the Peters Pipeline primarily because it was concerned about the

reliability of the Belotta Pipeline:

A. Later on our position about the Peters pipeline changed because we became

concerned about reliability of the Belotta pipeline.

There was a particular event involving a pickup driven by one of the

employees of Stockton East that backed up or drifted into a canal, and the

supply, the sole supply, was potentially contaminated and we were concerned

about water supply to the entire Stockton metropolitan area. And so that was

one of the catalyst issues that led us to become concerned about the reliability

of having a single pipeline feeding Stockton East water treatment plant from

the east.

And I think that and more discussion in general led the city at least – I

can’t speak on behalf of Cal Water, but certainly the city – to think well,

maybe it is time to construct the Peters pipeline, and then shortly thereafter the

Peters pipeline was designed and built.

Q. Did the amount of water that [Reclamation] was allocating to Stockton

East under the contract during that time period influence the city’s position on

the Peters pipeline?

A. Not really. I don’t believe so. Certainly as engineers and water purveyors

we like to have more capacity if we can get it, but from memory I remember

40

that the predominant thinking of myself and I think others at the city was it

was primarily intended to enhance reliability.

Tr. 183-84 (Madison). Although Mr. Madison later indicated in his answer that the

availability of New Melones water was a factor affecting the City’s support for the pipeline

project, the “catalyst” and “predominant” factor influencing the City’s eventual decision to

support the pipeline project was the reliability of the Belotta Pipeline. Id. The balance of

Mr. Madison’s testimony therefore belies Stockton East’s assertion that it would have

obtained financing from the Urban Contractors in 1999 but for the breach.

Stockton East also contends that Mr. Kauffman’s analysis of accelerated infrastructure

improvements is reasonable because it is based upon a 1989 design report of the DWTP

indicating that the DWTP was designed to be expanded to the 60-mgd level. See Pl.

Stockton East’s Br. filed Dec. 10, 2012, at 14 (citing PX 531; Tr. 227-28 (Kauffman)).

However, the cited trial testimony does not state that the 1989 design report was the

foundation of Mr. Kauffman’s analysis, see Tr. 227-28 (Kauffman), and the design report is

of little relevance because it does not appear to indicate when Stockton East expected to

achieve a 60-mgd capacity at the DWTP. See PX 531. In fact, a contemporaneous 1989

report of the NMCS actually stated that the capacity of the DWTP was projected to increase

to 60 mgd in the year 2010 – eight years after Mr. Kauffman estimated that the DWTP would

have achieved a 60-mgd rated capacity but for the breach. PX 444, at SEWD123726-D

(“The sedimentation basin capacity will be doubled in the year 2010 to increase the overall

plant capacity to 60 MGD[.]”). 33/

Stockton East has failed to meet its burden of establishing a plausible but-for world

regarding its M&I water use in the years 2001 to 2004. See, e.g., S. Nuclear Operating Co.,

637 F.3d at1304 (“‘Because plaintiffs . . . are seeking expectancy damages, it is incumbent

upon them to establish a plausible ‘but-for’ world’” (quoting Yankee Atomic, 536 F.3d at

1273)); Energy Nw., 641 F.3d at 1308 (“[T]he burden of proving the non-breach world . . .

lie[s] with [the plaintiff].”). Stockton East’s estimate of M&I water use from 2001-2004 is

predicated upon its ability to complete construction of the Peters Pipeline project by 2000.

See PX 563. The record reflects that numerous contingencies, in addition to the availability

of New Melones water, would have substantially affected the ability of Stockton East to

construct the Peters Pipeline by that time. The proposition that the grant money would have

been available six years prior lacks record support, and the City had financial concerns and

33/ The court admitted PX 444, over defendant’s objection, to the extent it was cited

during trial. Tr. 1184-85. In restricting lengthy documents to the extent that they are the

subject of testimony, or, if not objected to, argument by counsel, the court reserved the right

to read other portions for context. This reference falls within that scope, although Stockton

East sought to admit PX 444, including the page cited above. Id.

41

other priorities – namely, the South Stockton Aqueduct – at that time. Tr. 201-02 (Madison).

Completion of the project also required Stockton East to acquire easements, complete

environmental assessments, comply with other regulatory steps, and procure a contractor.

See DX 929. Even though Stockton East admittedly continued “pushing forward” with the

project despite the breach, see Tr. 551-52 (Kauffman), construction of the project still was

ongoing almost two-and-one-half years after Stockton East secured financing, Tr. 572-73

(Kauffman). Mr. Kauffman’s but-for model of infrastructure improvements, see PX 435; PX

563, which was based upon his “brainstorming session” with Stockton East staff, Tr. 238

(Kauffman), failed to account for the complexity and contingencies involved in constructing

this project. 34/ The court therefore finds it implausible that Stockton East would have

completed construction of the pipeline in 2000 and taken additional M&I water from 2001-

2004 if Reclamation had not breached the Contract beginning in 1999. 35/

For the years 1999 and 2000, Stockton’s but-for analysis of its M&I water use was not

contingent upon the acceleration of the Peters Pipeline project. See PX 563 (column H); Tr.

363-64 (Kauffman) (describing “Enhancement #1” in PX 563). Mr. Kauffman projected that

Stockton East would have been able to take additional M&I water in 1999 and 2000 due to

the acceleration of other enhancements that would have increased the capacity of the DWTP

from 40 mgd to 45 mgd beginning in 1999. Tr. 238-39, 363-64 (Kauffman). However, the

evidence adduced at trial demonstrates that the DWTP already was operating at a capacity

34/ See supra note 20.

35/ To its credit, Stockton East showed that Cal Water and the City could have used

additional surface water during the breach years. The Urban Contractors submitted annual

reports to Stockton East during the breach years depicting how much surface water and

groundwater the Urban Contractors used for M&I purposes. See Tr. 140-41, 155-56

(Kauffman) (discussing PX 432). The court admitted PX 432 as a summary of those annual

reports. See PX 432, at SEWD122942-D to 43-D; Tr. 159. Those reports show that for each

year of the breach the total amount of groundwater pumped by the Urban Contractors was

greater than the amount of surface water that Stockton East purportedly would have run

through the DWTP but for the breach. Compare PX 432, at SEWD122942-D to 43-D

(columns labeled “wells”), with PX 563 (column K). Because the Urban Contractors had a

policy or practice of maximizing surface water use and reducing groundwater pumping, see

Tr. 174-75, 216-17 (Madison); Tr. 863-65 (Ferraro), the Urban Contractors would have

replaced most of their groundwater pumping with the additional surface water that would

have been available from Stockton East, Tr. 212-17 (Madison); Tr. 866-68 (Ferraro)

(discussing PX 432). However, the Urban Contractors’ demand for additional surface water

does not entitle Stockton East to expectancy damages, because Stockton East did not show

that it would have had the facilities in place to treat and deliver the additional water. See Tr.

223-24 (Madison).

42

of 45 mgd in 1999 and 2000. As part of its application to the CDPH to increase the rated

capacity of the DWTP from 40 to 45 mgd, Stockton East placed particle counting equipment

on its filters to test the ability of the DWTP to properly treat water while operating at the 45-

mgd level. Tr. 233-35 (Kauffman). In 1999 the CDPH gave Stockton East approval to

operate the DWTP at the 45-mgd level for purposes of collecting data from the particle

counting equipment. Tr. 451 (Kauffman); see also PX 525. The CDPH’s approval of

Stockton East’s application contains a chart showing that Stockton East operated the DWTP

at the 45-mgd level during the majority of months in the May 1999 to August 2000 time

period. See Tr. 596 (Kauffman); PX 525, at SEWD 122436-D to 37-D. 36/ Moreover, on

September 26, 2000, the CDPH approved Stockton East’s application and granted Stockton

East a permit to operate the DWTP at a rated capacity of 45 mgd, meaning that the DWTP

was operating at a rated capacity of 45 mgd for at least the last three months of 2000. 37/ See

Tr. 598 (Kauffman); PX 525. Because the DWTP was already operating at a 45-mgd

capacity in 1999 and 2000 in the non-breach world, Stockton East has not shown that it

would have been able to treat additional water in those years but for the breach.

Stockton East’s but-for model of M&I water use also fails to incorporate the costs that

it avoided due to Reclamation’s breach. A plaintiff’s expectancy damages recovery must be

reduced by the amount of avoided costs “in order to ensure that the [damages award] . . . does

not represent an overstatement of the loss fairly attributable to the breach.” Bluebonnet V,

339 F.3d at 1345; see also Carolina Power & Light, 573 F.3d at 1277. In Southern Nuclear

the Federal Circuit held that the breaching party bears the burden of production on avoided

costs and therefore must “identify the nature” of the costs that were avoided because of the

breach. 38/ See 637 F.3d at 1304. Defendant in this case identified the nature of the costs

36/ Although these two pages were not admitted into the record, Mr. Kauffman

testified as to the former. See Tr. 596 (Kauffman). These pages therefore fall within the

scope of the court’s rule that, in restricting the admission of lengthy documents to the extent

that they are the subject of testimony, the court reserves the right to read other portions for

context. See supra note 33.

37/ Stockton East argued in its post-trial reply brief, without citation to the record,

that the DWTP did not operate at 45 mgd “consistently” in 1999 and 2000. See Pl. Stockton

East’s Br. filed Dec. 10, 2012, at 15. However, Stockton East has not quantified this

inconsistency, and Mr. Kauffman’s analysis did not appear to take this contemporaneous

indication of the DWTP’s operating capacity into account. See Tr. 233-35 (Kauffman).

38/ Although the Federal Circuit in that case noted the defendant’s “remarkable

silence about the nature and amount” of the avoided costs, the court remanded with

instructions that the defendant “must identify the nature of the avoided costs in question on

remand.” S. Nuclear Operating Co., 637 F.3d at 1304. The court reasoned that “[p]laintiffs

43

that Stockton East would have avoided if it would have been able to take more M&I water

– the costs of transporting, treating, and distributing the water through the treatment plant.

See Def.’s Br. filed Nov. 29, 2012 [362], at 37 (citing PX 500, at 32). Defendant cites

Stockton East’s March 31, 2002 financial statement, which lists specific “Treatment Plant

Expenses” under several categories, including “Transmission & Distribution” and “Water

treatment.” PX 500, at 32; see Def.’s Br. filed Nov. 29, 2012 [362], at 37 (citing PX 500, at

32).

Once the breaching party points out the nature of the avoided costs, the “burden

shift[s] to the plaintiff to incorporate those saved costs into its formulation of a plausible but-

for world.” S. Nuclear Operating Co., 637 F.3d at 1304. Neither Mr. Kauffman’s

formulation of M&I water use in the but-for world nor Mr. Harry’s calculation of Stockton

East’s damages, which was based upon Mr. Kauffman’s analysis, incorporated the water

treatment expenses that Stockton East avoided because of Reclamation’s breach. 39/ During

closing argument Stockton East’s counsel explained that avoided costs were a “nonissue” in

the case because “the vast majority of the cost that Stockton East incurs in its operation are

facilities costs, which are essentially fixed.” Closing Arg. Tr. 35-36 (Spaletta). However,

Mr. Ferraro testified that Stockton East incurs variable operating costs, which the Urban

Contractors then reimburse to Stockton East:

[W]hat we pay Stockton East is a fixed amount based on their facilities, the

cost of their facilities, and then an incremental amount based on the actual

operating cost of those facilities, so . . . we would have been paying to

Stockton East . . . those additional incremental operating costs[.]

Tr. 869 (Ferraro). Stockton East argues that these avoided costs would have been offset with

forgone revenue from the Urban Contractors and therefore should not be included in

Stockton East’s formulation of its expectancy damages. See Pl. Stockton East’s Br. filed

Dec. 10, 2012, at 17; see also Tr. 1329-30 (Harry). The court is perplexed why Stockton East

takes this position on expectancy damages, given its arguments in support of its mitigation

38/ (Cont’d from page 43.)

cannot be expected to brainstorm every possible cost they would have saved in the non-

breach world. Hence, a defendant must move forward by pointing out the costs it believes

the plaintiff avoided because of its breach.” Id. (citing Mech-Con Corp. v. West, 61 F.3d

883, 886 (Fed. Cir. 1995)).

39/ To the extent that Mr. Harry did address avoided costs, it was only to opine that

the amount that Stockton East would have paid to Reclamation in the but-for world would

have been offset by additional revenue to Stockton East. See Tr. 1329-30 (Harry).

44

damages claim. Stockton East argues that it is entitled to mitigation damages even though

the Urban Contractors ultimately reimbursed Stockton East for its mitigation costs – the

amount paid to OID and SSJID for water purchased under the 1997 Transfer Agreement. 40/

See Pl. Stockton East’s Br. filed Nov. 22, 2012, at 22-23. Stockton East cites no legal

authority explaining why the court should treat avoided costs and mitigation costs differently

for purposes of assessing the impact of offsetting revenue from the Urban Contractors. See

id. The purpose of deducting avoided costs from an expectancy damages award is to “ensure

that the [damages award] . . . does not represent an overstatement of the loss fairly

attributable to the breach[.]” Bluebonnet V, 339 F.3d at 1345. Avoided costs therefore

should be deducted from a potential damages award, regardless of whether Stockton East

passed its cost savings on to its customers. Stockton East failed to meet its burden of

establishing a but-for scenario that incorporated the water treatment expenses avoided due

to the breach. See S. Nuclear Operating Co., 637 F.3d at 1304 (holding that plaintiff bears

the burden of persuasion with respect to avoided costs).

2) Analysis of Stockton East’s projected agricultural water use

but for the breach

Defendant’s damages expert, Ali Shahroody, noted that Mr. Kauffman’s analysis of

agricultural use but for the breach varied from a low of 152 acre-feet in one breach year to

a high of over 5,287 acre-feet in another breach year. Tr. 2188 (Shahroody); see also PX 563

(column N). Based on this observation, Mr. Shahroody concluded that Stockton East’s

projection of agricultural use in the but-for world was a “paper exercise[.]” Tr. 2188

(Shahroody). In other words, Stockton East’s estimate of agricultural use in the years 2000-

2004 was merely the delta between (1) the Build-Up Schedule (column Q in PX 563),

Stockton East’s actual total use of New Melones water (column G in PX 563), and (2)

Stockton East’s estimate of its M&I use but-for the breach (column M in PX 563). See Tr.

2188-89 (Shahroody).

In its post-trial reply brief and at closing argument, Stockton East admitted that Mr.

Kauffman “artificially capped” his estimate of agricultural use but for the breach. Pl.

Stockton East’s Br. filed Dec. 10, 2012, at 14-15; Closing Arg. Tr. 21-22 (Spaletta).

Stockton East points out that Mr. Kauffman initially included greater amounts of agricultural

use in his but-for analysis, but revised those numbers downward to comply with the court’s

pretrial ruling that Stockton East could not seek damages exceeding the minimums listed in

the Contract’s Build-Up Schedule. Pl. Stockton East’s Br. filed Dec. 10, 2012, at 14-15;

Closing Arg. Tr. 21-22 (Spaletta). Because Reclamation’s breach in the years 1999-2004

was based on its failure to deliver the minimum volumes in the Build-Up Schedule, see

40/ The court addresses these arguments in greater detail in Part III of the

“Discussion” section of this opinion.

45

Stockton III, 583 F.3d at 1356-57, 1364-65, this court ruled that Stockton East could not

present evidence that it would have requested more than the Contract minimums for each

year of the breach. See Order entered Aug. 24, 2012, at 2-4

Stockton East chose to present its model of the but-for world in a chart with

calculations that combined both its M&I and agricultural use. See PX 563. This court’s pre-

trial ruling did not require Stockton East to put on its case in this manner. See Order entered

Aug. 24, 2012, at 2-4. Stockton East’s estimates of M&I and agricultural use in the but-for

world rested on different premises: although its M&I use was contingent upon the Peters

Pipeline extension and the DWTP improvements, Stockton East did not need to use such

facilities to deliver water to some of its agricultural customers. Tr. 776-78 (Kauffman).

Given the different assumptions underlying its M&I and agricultural demand, Stockton East

could have presented an independent analysis of its agricultural use. Based on that

independent model, Stockton East could have argued in the alternative that, if the court

declined to award damages for M&I water, Stockton East had shown its expectancy damages

for agricultural water alone. The court instead is left with a projection of agricultural use that

represents the difference between the Build-Up Schedule and Stockton East’s M&I water

use. Thus, Stockton East’s calculation simply assumes that agricultural demand would equal

whatever supply of New Melones remained after Stockton East satisfied its M&I demand.

Such an estimate cannot form the basis of a plausible but-for model because the

evidence shows that numerous factors, in addition to the breach, would have affected

agricultural demand for New Melones water. Mr. Kauffman indicated that the lack of

availability of New Melones water was not the only reason that it proved difficult for

Stockton East to convince farmers to convert from groundwater to surface water. Tr. 630-31

(Kauffman). To convert to surface water, a farmer must pay to install the necessary

infrastructure to connect to a pipeline or to divert the surface water from a natural stream

course. Id. For properties abutting the Peters Pipeline, which has some existing connections,

the cost for farmers would be at least $15,000.00 to $20,000.00. Tr. 630 (Kauffman). In

contrast, a diversion from a natural stream course could cost a farmer at least $50,000.00.

Tr. 631 (Kauffman). Mr. Kauffman also agreed that it was “difficult” to convert farmers to

surface water during the breach years because Stockton East charged farmers a higher rate

for surface water than for groundwater. Id.

Stockton East insists that its estimate of additional agricultural use is plausible

because it reflects a conversion of 800 to 1,500 acres of farmland to surface water during the

breach years and Stockton East actually exceeded that level of conversion post-breach. See

Pl. Stockton East’s Br. filed Nov. 9, 2012, at 10. Although Mr. Kauffman stated that

Stockton East has converted more than 1,500 acres of farmland “since the breach period to

2010[,]” Tr. 377 (Kauffman), Stockton East did not present any evidence that such

conversions plausibly would have occurred during the 1999 to 2004 period if Reclamation

46

began making the minimums available beginning in 1999. 41/ Under cross-examination Mr.

Kauffman revealed that his methodology for estimating additional agricultural use in the but-

for world involved only a simple comparison of agricultural use in 2010 and the 1999-2004

breach period:

Q. How much of this agricultural water couldn’t have been delivered if the

Peters pipeline had not been constructed at that period?

A. I did not estimate that. As I explained before, once we saw the numbers,

comparing 2010 numbers to 1999 and 2004 numbers, I did no further analysis,

I just noted it was considerably more, so it wasn’t a concern of mine to split

those numbers up.

Tr. 605 (Kauffman).

On redirect Mr. Kauffman pointed to a large map of the Central Valley – PX 518 –

and explained that, without the six-mile extension to the Peters Pipeline, Stockton East would

have been able to serve the agricultural areas along Mormon Slough, Potter Creek, and the

portion of the Peters Pipeline extending from the constant head vault to the Mormon Slough.

Tr. 776-78 (Kauffman). Stockton East cites this testimony as evidence that these properties

“would easily hook-up and take the water.” See Pl. Stockton East’s Br. filed Dec. 10, 2012,

at 6 (citing Tr. 776-78 (Kauffman)). Contrary to Stockton East’s assertion, Mr. Kauffman

did not present any testimony regarding the approximate number of acres in these corridors

that had connections to the New Melones supply during the breach period. See Tr. 776-78

(Kauffman). To the extent this acreage did not have connections, Stockton East presented

no analysis showing how many acres converted to surface water post-breach and projecting

when those conversions would have occurred absent a breach. 42/ Given the dearth of

41/ In fact, Stockton East’s records of actual agricultural use suggest that such

conversions may not have taken place until five or six years after the end of the breach

period. See PX 434 (column labeled “USBR AGR”) (showing a spike in the use of New

Melones water for agricultural purposes in the years 2010 and 2011).

42/ One exhibit in the record – PX 437 – contains a chart entitled “Estimated Timing

of Potential Surface Water Users” and shows agricultural acres listed next to each breach

year. See PX 437, at SEWD122954-D. This exhibit was discussed only during Mr.

Kauffman’s cross-examination, and that discussion did not include a specific reference to the

chart in question. See Tr. 605-13, 2473-74 (Kauffman). Stockton East did not affirmatively

rely on PX 437 to prove its estimate of additional agricultural demand, and the court was

provided with little information regarding its significance. See id. That exhibit therefore

cannot form the basis of Stockton East’s expectancy damages award for agricultural use.

47

evidence regarding Stockton East’s projected demand for agricultural water and Stockton

East’s own admission that other factors made it difficult to convert farmers to surface water,

Stockton East has not met its burden of establishing a plausible but-for model of its

agricultural use. 43/

3) Analysis of Stockton East’s groundwater recharge and “proxy cost

of cover” methods for calculating expectancy damages

A plaintiff seeking expectancy damages bears the burden of establishing a “plausible

but-for world.” See, e.g., S. Nuclear Operating Co., 637 F.3d at 1304 (citation omitted);

Kan. Gas and Electric, 685 F.3d at 1371 (citations omitted). As discussed above, Stockton

East has not met its burden of demonstrating that it plausibly would have had the ability to

take additional M&I and agricultural water during the breach years. Both the groundwater

recharge and “proxy cost of cover” methods for calculating damages rest upon Mr.

Kauffman’s flawed analysis that Stockton East would have had the ability to request an

additional 82,955 acre-feet of water during the breach years. See Tr. 1292-93 (Harry); PX

554, at 5; Pl. Stockton East’s Br. filed Nov. 9, 2012, Ex. B. Accordingly, the court rejects

Stockton East’s expectancy damages calculations because they are not based on a plausible

but-for model.

Even assuming that Mr. Kauffman’s analysis plausibly established Stockton East’s

additional water use in the but-for world, the court is not in a position to award expectancy

damages based upon Stockton East’s groundwater recharge calculation because Stockton

East’s groundwater recharge approach to calculating its damages is speculative and

inherently unreliable. See, e.g., Ind. Mich. Power Co., 422 F.3d at 1373 (explaining that

recovery of speculative damages is precluded) (citing San Carlos Irrigation & Drainage

Dist., 111 F.3d at 1563). Although Stockton East has an option to purchase the property on

which the north site facility would be located, it has not exercised that option and does not

have another opportunity to exercise that option until October 15, 2013. See Tr. 639-40

(Kauffman). Furthermore, Stockton East has not completed the environmental work

associated with the north site facility, and its Board of Directors has not voted to approve

construction of the project. Tr. 640-41 (Kauffman). Stockton East also has not obtained the

considerable financing it needs to build the project. Id. Although Stockton East is in

43/ Stockton East has not argued that it would have requested additional water but

for the breach for purposes of selling water outside its boundaries. Article 10 of the Contract

provides that “[w]ater furnished to the Contractor pursuant to this contract shall not be sold,

exchanged, or otherwise disposed of for use outside the Contractor’s service area without

prior written consent of the Contracting Officer.” PX 36, at 00368. Stockton East presented

no evidence regarding whether the contracting officer would have provided such written

consent in the but-for world.

48

negotiations with the Urban Contractors to obtain financing, the Urban Contractors have not

agreed to finance the project. Id. Mr. Kauffman admitted on cross-examination that the

north site facility may never be built. Tr. 641-42 (Kauffman). Stockton East’s effort to

monetize its expectancy damages thus rests on a wholly speculative construct. Stockton East

may be tasked to recharge the groundwater basin, but it has never built this recharge facility.

No case decided by the Federal Circuit involving expectancy damages has endorsed an award

for an activity undertaken in the but-for world that has been pyramided exclusively on

assumptions regarding its hypothesized construction and operation in the future. Given the

numerous uncertainties associated with the north site recharge facility, Stockton East’s

groundwater recharge method is speculative and unreliable.

Citing the Restatement (Second) of Contracts, Stockton East argues that its

groundwater recharge method for calculating damages is proper because expectancy damages

“‘take account of any special circumstances that are peculiar to the situation of the injured

party, including his . . . own needs and opportunities.’” Pl. Stockton East’s Br. filed Nov.

9, 2012, at 15 (quoting Restatement (Second) of Contracts § 344 cmt. a (1981)); see also

Closing Arg. Tr. 7-10 (Spaletta). The court is mindful of Stockton East’s mission to address

the overdraft of the groundwater basin and acknowledges that Stockton East as a non-profit

may have sold its Contract water at a loss to effectuate its public mission. Nonetheless, the

law of contracts does not provide for an award of damages based upon the construction of

a facility that was not contemplated by the Contract, was not foreseeable under the Contract,

has not been built, and may never be built. The Restatement commentary cited by Stockton

East illustrates no scenario under which a court should award such damages to take account

of the non-breaching party’s peculiar circumstances. In fact, the sentence immediately

following the “special circumstances” language states: “In practice, however, the injured

party is often held to a more objective valuation of his expectation interest because he may

be barred from recovering for loss resulting from such special circumstances on the ground

that it . . . cannot be shown with sufficient certainty.” See Restatement (Second) of Contracts

§ 344 cmt. b. In this case Stockton East’s groundwater recharge computation is speculative

and therefore cannot form the basis of its damages.

Stockton East also characterizes its groundwater recharge calculation as a form of

“consequential damages[.]” See Pl. Stockton East’s Br. filed Dec. 10, 2012, at 18-19.

Stockton East cites two cases for the proposition that “[c]onsequential damages are based on

estimates of what would have been if the contract had been performed, rather than on actual

expenditures made.” See id. (citing Simeone v. First Bank Nat’l Ass’n, 73 F.3d 184 (8th Cir.

1996); Nyquist v. Randall, 819 F.2d 1014 (11th Cir. 1987)). Neither case, however, is

analogous to the damages claim in the case at bar. In Simeone the Eighth Circuit upheld an

award of consequential damages for defendant’s breach of a contract related to the sale of

a vintage automobiles and parts. 73 F.3d at 188-89. The consequential damages award was

based on the market value of the vehicles and parts at the time of the breach, in addition to

49

their appreciated value two years after the breach. Id. at 189. Plaintiff’s damages award in

Simeone did not include specific performance or the costs of actually building the facilities

to construct or re-create the vehicles and auto parts. Id. Simeone therefore does not support

Stockton East’s claim that it is entitled to damages based upon the costs of constructing a

direct recharge facility to replenish the basin with the water it would have purchased but for

the breach. In Nyquist the Eleventh Circuit affirmed an award of consequential damages,

based upon lost profits, to a cattle buyer who lacked the financial capacity to purchase

substitute cattle. 819 F.2d at 1017-19. Nyquist also is distinguishable from the present case

because the buyer’s lost profits in Nyquist were established based upon a pre-existing lease

that the buyer had arranged with a third party at the time of the contract. Id. at 1015-17. In

contrast, Stockton East’s claim for groundwater recharge damages is speculative because it

is based upon the hypothetical cost of constructing a facility that was not contemplated at the

time of contracting and may never be built.

To the extent Stockton East had established a plausible but-for model, its “proxy cost

of cover” method may have provided a legally cognizable basis for computing its expectancy

damages. 44/ See Restatement (Second) of Contracts § 344 cmt. b (explaining that when

44/ Given this matter’s lengthy history and in an abundance of caution, a discussion

of the proper computation of Stockton East’s “proxy cost of cover” damages is appropriate.

Central presented the expert testimony of Dr. Smith, who was qualified as an expert on the

sport-market value of water with respect to Central during the breach. See Tr. 1992. Dr.

Smith examined twenty-one one-year water transactions involving water rights originating

on the San Joaquin River or its tributaries – the geographic market where both Central and

Stockton East are located. See Tr. 1997-2002 (Smith). Using those data, Dr. Smith opined

that the spot-market value of water was $60 per acre-foot in 1999, $80 in 2000, $90 in 2001,

$135 in 2002, $85 in 2003, and $120 in 2004. See Tr. 2009-18 (Smith). The evidence

offered by Central would be appropriate for consideration in determining an annual spot-

market price for Stockton East.

The court also heard testimony as to the spot-market price of water from Messrs.

O’Laughlin and Landry. Neither witness’s testimony is entitled to as much weight as that

of Dr. Smith. Mr. O’Laughlin testified only as to the price OID wanted to charge for transfer

water during the breach period, which was $100 per acre-foot. See Tr. 899-900

(O’Laughlin). Such a limited data set is less reflective of the broader market examined by

Dr. Smith. Mr. Landry’s testimony is not as probative as Dr. Smith’s for a similar reason.

Although Mr. Landry examined short-term contracts within the San Joaquin Basin, as Dr.

Smith did, he examined only transactions in which Reclamation acquired water, excluding

other transactions to protect data gathered by his company that he considered proprietary.

See Tr. 956-57 (Landry). Mr. Landry testified that he found the Reclamation transactions

to be representative, but offered no further support for that statement. See Tr. 957 (Landry).

50

non-breaching party with special circumstances “cannot recover for loss that he could have

avoided by arranging a substitute transaction on the market . . . his recovery is often limited

by the objective standard of market price.” (citation omitted)). However, Stockton East also

failed to meet its burden of establishing a but-for scenario that incorporated the water

treatment expenses that it avoided due to the breach. Accordingly, the court cannot award

expectancy damages in this case based upon the “proxy cost of cover” method.

II. Costs of unused overhead

1. Standards for awarding damages for overhead costs

Stockton East also seeks to recover the “stranded costs” associated with the portion

of the NMCS that went unused as a result of Reclamation’s breach. Pl. Stockton East’s Br.

filed Nov. 9, 2012, at 28-29. Damages for overhead costs are recoverable where the

Government’s breach caused the non-breaching party to incur the overhead costs. See

Energy Nw., 641 F.3d at 1309-10 (explaining that plaintiff must “present a sufficient basis

for making the trial court reasonably certain that the claimed damages [for overhead

expenses] were caused by the breach”); cf Precision Pine & Timber, 596 F.3d at 834

(declining to award damages for fixed costs associated with operating sawmill because costs

“were not directly related to the . . . contract [at issue] and not a direct result of the

[breach]”). In the SNF context, for example, the Government’s breach caused the plaintiffs

to mitigate by constructing and maintaining new facilities for SNF storage. See, e.g., S. Cal.

Edison Co. v. United States, 655 F.3d 1319, 1322 (Fed. Cir. 2011) (affirming an award for

overhead costs associated with building, staffing, and maintaining new facility for SNF

storage). Because the overhead costs associated with the facilities were incurred as a result

of the breach, the utilities were entitled to recover damages for the overhead expenses. See

id. (distinguishing an SNF plaintiff from the plaintiff in Precision Pine “[b]ecause the [SNF

storage] facilities had not existed prior to the Government’s breach, and indeed were

necessitated by the breach”); Energy Nw., 641 F.3d at 1308-10 (affirming recovery of

overhead expenses allocated to mitigation projects undertaken because of Government’s

breach).

Courts also have awarded damages for overhead expenses when the Government

imposed a delay or suspension of the contract work and thereby interrupted or reduced the

44/ (Cont’d from page 50.)

Thus, Mr. Landry’s analysis was less reliable than Dr. Smith’s, and the court gives his

testimony less weight than that of Dr. Smith. Accordingly, if Stockton East had proven its

expectation damages, the proper spot-market price to use in any damages calculation is that

advanced by Dr. Smith’s testimony.

51

contractor’s stream of income. See, e.g., Interstate Gen. Gov’t Contractors, Inc. v. West, 12

F.3d 1053, 1057-58 (Fed. Cir. 1993). If the suspension or delay prevents the contractor from

taking additional work to absorb its overhead costs, the contractor may be entitled to recover

damages for those costs. See, e.g., Nicon, Inc. v. United States, 331 F.3d 878, 882-83 (Fed.

Cir. 2003); Melka Marine, Inc. v. United States, 187 F.3d 1370, 1374-75 (Fed. Cir. 1999).

In such cases the contractor’s overhead damages are calculated using the three-step Eichleay

formula. Capital Electric Co. v. United States, 729 F.2d 743, 747 (Fed. Cir. 1984) (restating

formula of Eichleay Corp., ASBCA No. 5183, 60-2 BCA ¶ 2688 (1960), aff’d on reconsid.,

61-1 BCA ¶ 2894); see also Nicon, 331 F.3d at 882-83.

2. The parties’ arguments

To support its damages claim for “stranded costs,” Stockton East primarily relies upon

the testimony of Mr. Kauffman and two experts – Elaine Vastis Conti and Mr. Harry. See

Pl. Stockton East’s Br. filed Nov. 9, 2012, at 13-14. Ms. Conti was qualified as an expert in

identifying and allocating the costs of water conveyance facilities, Tr. 1173-74, and

performed a calculation purporting to represent the costs that Stockton East incurred for the

portion of the NMCS that went unused as a result of Reclamation’s breach, Tr. 1161, 1202-

03 (Conti). Ms. Conti relied upon data from Stockton East’s audited financial statements and

documents from Stockton East depicting the costs of the NMCS. Tr. 1175-80 (Conti)

(discussing PX 490 and PX 497-503). Ms. Conti also based her analysis on Stockton East’s

water flow data in the breach world, PX 411, and Mr. Kauffman’s estimate of Stockton

East’s additional water use in the non-breach world, PX 563; see Tr. 1175, 1195-97 (Conti).

Ms. Conti’s testimony regarding her methodology distills to the following level of

coherence. First, she calculated the annual depreciation expense of the NMCS by dividing

the actual construction cost of each component of the NMCS by the expected service life of

each component. Tr. 1187-91 (Conti); see, e.g., PX 556, at 1 (column c). Second, Ms. Conti

computed the rate of return for this annual depreciation expense by weighting Stockton

East’s costs of debt and equity in each breach year. Tr. 1191-92 (Conti); see, e.g, PX 556,

at 1 (column j). Using this rate of return, Ms. Conti calculated an annual return on

investment, see, e.g., PX 556, at 1 (column k), which represents a proxy for the interest that

Stockton East paid in each breach year to finance its debt service for the NMCS. Tr. 1192-93

(Conti). Ms. Conti then compared the water flows that would have occurred in the NMCS

in the but-for world, see PX 563, with the water flows that occurred in the actual world, see

PX 411; Tr. 1195-97 (Conti); PX 557, at 1. Based upon that comparison, Ms. Conti

determined a percentage of each component of the NMCS that went unused as a result of the

breach in each year from 1999 to 2004. Tr. 1197-99 (Conti); PX 557, at 2. Finally, Ms.

Conti multiplied those percentages by the sum of the annual depreciation and the annual

return on investment for each year. Tr. 1200 (Conti); see, e.g., PX 556, at 1 (column o).

That calculation represents her estimate of the cost of the unused portion of the NMCS in

52

each breach year. Tr. 1203 (Conti); see PX 555. Based on Ms. Conti’s analysis, Stockton

East seeks recovery of “stranded costs” in the amount of $1,599,960.00. PX 555; Pl.

Stockton East’s Br. filed Nov. 9, 2012, at 29; see Tr. 1205 (Conti).

Stockton East points out that its damages expert Mr. Harry reviewed Ms. Conti’s

analysis and concluded that it was part of a “lost profits” analysis. Pl. Stockton East’s Br.

filed Nov. 9, 2012, at 14 (citing Tr. 1278 (Harry)). Mr. Harry also confirmed the accuracy

of Ms. Conti’s computations and opined that her approach was conservative. Id. (citing Tr.

1280-81 (Harry)).

Defendant challenges Stockton East’s “stranded costs” claim on three separate

grounds. 45/ First, defendant points out that Stockton East’s stranded costs model is not

based upon the assumption that Reclamation’s breach deprived Stockton East of revenues

that Stockton East would have used to absorb its fixed costs. Def.’s Br. filed Nov. 29, 2012

[362], at 38-39. In that respect Stockton East’s stranded costs claim is distinct from those

cases where overhead damages are awarded based on the Eichleay formula. Id. at 39.

Second, defendant argues that Stockton East would have incurred its overhead costs

regardless of the breach. Id. at 38-39. Stockton East’s stranded costs claim therefore is not

analogous to the overhead damages awarded to the SNF plaintiffs. Id. at 39-40. Third,

defendant contends that the “rate of return” component of Stockton East’s stranded costs

claim is nothing more than the addition of interest to Stockton East’s claim for depreciation

costs and therefore is unrecoverable under the no-interest rule set forth in 28 U.S.C. § 2516.

Id. at 40.

3. Analysis of Stockton East’s “stranded costs” damages

Ms. Conti’s calculation of “stranded costs” relied upon Mr. Kauffman’s estimate of

Stockton East’s additional water use but for the breach. See Tr. 1175, 1195-97 (Conti); PX

557, at 1. As discussed in Part I.3. supra, Mr. Kauffman’s analysis – summarized in PX 563

– did not demonstrate that Stockton East would have had the ability to take an additional

82,955 acre-feet of water from Reclamation during the breach years. Mr. Kauffman’s

estimate of Stockton East’s additional M&I and agricultural water use but for the breach

consequently was not established, even given the relaxed plausibility standard used in but-for

scenarios. Because Ms. Conti’s methodology was based upon that flawed analysis, Stockton

East’s “stranded costs” claim fails.

45/ See supra note 18. The pretrial order allowed Stockton East to make its overhead

damages claim, but did not rule on whether Stockton East’s methodology for presenting it

had been recognized in the case law. See Order entered Aug. 24, 2012, at 18-19.

53

Even assuming that Mr. Kauffman’s analysis plausibly shows that Stockton East

would have taken an additional 82,955 acre-feet of New Melones water but for the breach,

Stockton East has not established that its “stranded costs” are a recoverable form of damages

in the case at bar. The court ruled at trial that Ms. Conti was not qualified to testify as to

whether her analysis was supported by reliable principles and methodologies with respect to

calculating damages in a breach of contract case involving unused capacity in a water

conveyance system. Tr. 1174. Stockton East’s counsel proffered that it did not call Ms.

Conti to opine on such matters and that Mr. Harry would vouch for the propriety of claiming

stranded costs as an item of damages in this case. Tr. 1157 (Spaletta).

Mr. Harry testified on direct examination that Stockton East’s “stranded costs” claim

was a proper measure of damages because it was “one part of” a “lost profits” or “lost

contribution margin” approach to damages:

Q. [T]urning to the second category of damages that you described relating to

the costs of the New Melones conveyance

This text is long and has been trimmed here. Open the source document for the complete record.