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

> United States Court of Federal Claims · February 28, 2013 · 109 Fed. Cl. 760

URL: https://www.frixlaw.com/law-library/cases/822749

## Case

- **Full name:** STOCKTON EAST WATER DISTRICT and Central San Joaquin Water Conservation District, Plaintiffs, v. the UNITED STATES, Defendant
- **Court:** United States Court of Federal Claims
- **Decided:** February 28, 2013
- **Citations:** 109 Fed. Cl. 760; 2013 U.S. Claims LEXIS 130; 2013 WL 766531
- **Precedential status:** Published
- **Opinion:** Opinion by Miller
- **Judges:** Miller
- **Cited by:** 7 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/822749

## How later opinions describe it (automated extraction)

- finding long-time employee of water district was not qualified to opine as an 3 expert witness on water usage by a city

## Opinion text

In the United States Court of Federal Claims
No. 04-541L
(Filed February 28, 2013)
*********************** *
*
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.
*
v. *
*
THE UNITED STATES, *
*
Defendant. *
*
*********************** *

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.

2
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.

3
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.

4
(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.

6
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

7
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.”).

8
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:

9
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.

10
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. N

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/822749. Public record. Not legal advice.