Free Published Opinion/Order - District Court of Federal Claims - federal

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In the United States Court of Federal Claims
No. 04-541L (Filed February 20, 2007) ******************* STOCKTON EAST WATER DISTRICT, CENTRAL SAN JOAQUIN WATER DISTRICT, COUNTY OF SAN JOAQUIN, CITY OF STOCKTON, and CALIFORNIA WATER SERVICE COMPANY, Plaintiffs, v. THE UNITED STATES, Defendant. ******************* * * * * * * * * * * * * * * * * * * *

Contracts; breach of contract; summary judgment; takings; Reclamation Projects Authorization and Adjustment Act of 1992, Pub. L. No. 102-575, 106 Stat. 4600 (1992); RCFC 52(c) judgment on partial findings; third-party beneficiary status; sovereign acts doctrine and unmistakability doctrine; contract interpretation ­ plain meaning and ambiguity; substantial performance of contract; adverse inferences drawn from non-testifying witnesses; viability of takings claim after full prosecution of contract claims.

Roger J. Marzulla, Marzulla & Marzulla, Washington, DC, for plaintiffs; Reid W. Roberts, Stockton, CA, for plaintiff Central San Joaquin Water District; Jeanne M. Zolezzi and Jennifer L. Spaletta, Herum Crabtree Brown, Stockton, CA, for plaintiff Stockton East Water District. William J. Shapiro, Sacramento, CA, Kristine S. Tardiff, Washington, DC, and Luther Hajek, Washington, DC, United States Department of Justice, with whom was Assistant Attorney General Matthew J. McKeown, for defendant. Shelly Randel, Attorney/Advisor, Office of the Solicitor, Branch of Water and Power, Department of the Interior. John D. Echeverria, Georgetown Environmental Law & Policy Institute, Washington, DC, and Hamilton Candee, for amicus curiae Natural Resources Defense Council, San Francisco, CA. Clifford T. Lee and Tara L. Mueller, for amicus curiae California State Water Resources Control Board.

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OPINION MILLER, Judge. PROCEDURAL HISTORY This case, before the court after trial, originally was filed in the United States District Court for the Eastern District of California in 1983 and was transferred to the United States Court of Federal Claims on April 1, 2004, as a takings claim. 1/ On April 20, 2004, plaintiffs

1/ Although the court has considered the testimony of every witness, discussion of each is not necessary in order to render a comprehensive decision. Plaintiffs presented one expert witness, Avry Dotan, an independent consultant, who holds a Master's Degree in Civil Engineering from the University of Minnesota. Mr. Dotan was plaintiffs' expert regarding hydrology of the Stanislaus River and modeling for the New Melones Reservoir. The following fact witnesses testified for plaintiffs: (1) David G. Houston, an investment banker with Citigroup, who was employed by the United States Department of the Interior ("Interior") as Special Assistant to Commissioner Brohbent from 1981 to 1982, United States Deputy Assistant Secretary for Land and Water from 1982 to 1983, and Regional Director of the Bureau of Reclamation from 1983 to 1989; (2) Reid W. Roberts, counsel for plaintiff Central San Joaquin Water Conservation District from 1980 to the present; (3) Grant O. Thompson, a farmer in the Central San Joaquin Irrigation District and Chairman of the Board of Directors for the Central San Joaquin Water District; (4) Edward M. Steffani, a civil engineer, who was employed as General Manager of Stockton East Water District from 1983 to 1999; (5) Kevin M. Kauffman, a civil engineer, who was General Manager of Stockton East Water District from July 1999 to the present; (6) Dr. C. Mel Lytle, who holds a Ph.D. in botany with special emphasis in plant ecophysiology, employed as Water Resource Coordinator for San Joaquin County from February 2002 to the present; (7) Michael E. Camy, who was employed by California Water Service Company from 1964 to 2001, where he served as District Manager of the Stockton system from 1997 to 2001; (8) Mark J. Madison, a civil engineer, who was employed by the City of Stockton from 1990 to the present, serving as Director of Municipal Utilities from December 2002 to the present; (9) Lowell F. Ploss, a career employee of the Bureau of Reclamation from 1969 to 2002, eventually overseeing, as Operations Manager of the Central Valley Operations Office, MidPacific Region, operations of the Central Valley Project from 1993 to 2000; and (10) Jeanne M. Zolezzi, who has been General Counsel for Stockton East Water District from 1990 to the present. Defendant presented the following fact witnesses: (1) Kirk C. Rodgers, who was 2

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amended the complaint to include a breach of contract claim. 2/ Defendant filed a motion to dismiss on June 21, 2004, which was denied on September 3, 2004. This procedural history, including the rulings of the district court and an explanation for the protracted period between filing of the action in federal district court and its eventual transfer to the Court of Federal Claims, is discussed in much greater detail in Stockton E. Water Dist. v. United States, 62 Fed. Cl. 379, 383-88 (2004). Following denial of defendant's motion to dismiss, the court ruled on 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 (2006) (the "Summary Judgment Opinion"). The Summary Judgment Opinion provided parties with a description of issues that required development at trial. They included: (1) the third-party beneficiary status of California Water, the City of Stockton, and the County of San Joaquin to the Stockton EastReclamation contract; (2) the facts regarding the possibility or impossibility of performance despite or because of the Reclamation Projects Authorization and Adjustment Act of 1992,

1/ (Cont'd from page 1.) employed by the Bureau of Reclamation from 1973 to the present and has served as Regional Director of the Mid-Pacific Region from 2002 to the present; (2) John A. Renning, a civil engineer, who was employed by the Bureau of Reclamation in Sacramento from 1975 to 2005, which included employment as a member of the Central Valley Operations Office from 1993 to 2001, and as regional water-rights officer for the Mid-Pacific Region from 2001 to 2005; (3) Roger K. Patterson, a civil engineer, currently an Assistant General Manager for the Metropolitan Water District in Los Angeles, who was employed by the Bureau of Reclamation from 1974 to 1999, serving as Regional Director for the Mid-Pacific Region from 1993 to 1999; and (4) Roger O. Guinee, who was employed by the United States Fish & Wildlife Service from 1977 to 1991 and by the California Department of Fish and Game, in its Region 2 office in Rancho Cordova from December 1991 to December 1992, and who has been the Supervisory Fish and Wildlife Biologist for the United States Fish & Wildlife Service's Sacramento office from January 1993 to the present. 2/ The takings claims were stayed pending resolution of the contract claims and were not at issue at trial. See Pls.' Br. filed Sept. 25, 2006, at 2 n.1 ("The parties understand that Plaintiffs' takings claim is not a part of the upcoming October 23, 2006 trial, and that this Court has reserved consideration of the taking claim until after it rules on the breach of contract claim in this trial."); Def.'s Br. filed Oct. 10, 2006, at 2 n.1 ("The takings claims are stayed pending resolution of the contract claims and are not at issue in the trial scheduled to begin on October 23, 2006."). 3

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Pub. L. No. 102-575, 106 Stat. 4600 (1992) (the "Central Valley Project Improvement Act" or "CVPIA"), which authorized the Central Valley Project (the "CVP"), contemplating a means to meet the water needs of the Central Valley Basin; (3) the impact of impossibility of performance on the applicability of the sovereign acts doctrine; (4) proof of a reasonable explanation, consistent with plaintiffs' obligations under the contracts, for their failure to submit schedules or their submission of schedules for lesser-than-desired quantities of water; (5) the intent of the parties in applying Article 9 of Stockton East Water District's and Central San Joaquin Water District's contracts with Reclamation (collectively, the "1983 Contracts"); (6) the "opinions and determinations" required to be issued by the contracting officer, as well as the decisions he actually issued under Article 12 of the 1983 Contracts and an evaluation of whether his determinations were arbitrary, capricious, or unreasonable under the circumstances; (7) the applicability of the New Melones Interim Plan of Operation as a mutual agreement under Article 3(h) of the 1983 Contracts; and (8) limitation of plaintiffs' water rights by background principles of state law. See Summ. J. Op. BACKGROUND The parties identified sixteen lawsuits and regulatory proceedings pursuant to this court's order for limited post-trial briefing, which stated: "By November 21, 2006, the parties shall submit a Joint Chart listing all lawsuits, state and federal, and regulatory proceedings, state and federal, identifying each by name, date filed, status, issues decided, issues not reached, issues stayed, and subsequent history." Order entered Nov. 9, 2006, ¶ 1. A chronology of each of these proceedings discussing its potential impact upon the instant case follows. I. State and federal lawsuits 1. Barcellos and Wolfsen, Inc. v. United States, No. 79-106 (E.D. Cal. filed Apr. 26, 1979)

Plaintiffs, landowners within "Area 1" of Westlands Water District, first brought an action to determine the validity of the 1963 CVP contract between Westlands Water District and the United States. The district court held that the United States was required to perform the 1963 CVP contract in 1986. In 1993 plaintiffs filed a claim to enforce the judgment, arguing that a non-alterable right to 900,000 acre-feet of water from the 1963 CVP contract could not be reduced by the United States under the Endangered Species Act of 1973, Pub. L. No. 93-205, 87 Stat. 884 (codified as amended in scattered sections of 7 and 16 U.S.C.) (the "ESA") or the CVPIA. The district court held that plaintiffs do not have an absolute contract right to the 900,000 acre-feet of water under the 1963 CVP contract and Article 11

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of the 1963 CVP contract 3/ permitted the United States to reduce water deliveries to Area 1 landowners under the ESA or the CVPIA. Barcellos and Wolfsen, Inc. v. United States, 849 F. Supp. 717, 730 (E.D. Cal. 1993). The court also held that plaintiffs could not seek APA review of the agency's actions regarding the 1993 water allocation and that such a claim would have to be pursued in a separate suit. Id. at 733-34. The United States Court of Appeals for the Ninth Circuit affirmed. O'Neill v. United States, 50 F.3d 677 (9th Cir. 1995), aff'g Barcellos and Wolfsen, Inc. v. United States, 849 F. Supp. 717 (E.D. Cal. 1993), cert denied, 516 U.S. 1028 (1995). The Ninth Circuit held the language of Article 11 of the 1963 contract "is unambiguous and that an unavailability of water resulting from the mandates of valid legislation constitutes a shortage by reason of `any other causes,'" and that "[t]he 1963 water service contract explicitly and unambiguously limits the liability of the government for water shortages, without exception." Id. at 684, 686. The court concluded that "the contract is not immune from subsequently enacted statutes," because it did not surrender in "unmistakable terms" Congress' sovereign immunity, and, thus, "nothing in the contract precludes [a shift in reclamation law regarding the priority of water uses by the CVPIA]." Id. at 686. 2. Westlands Water District v. United States, No. 93-5327 (E.D. Cal. filed May 17, 1993).

Plaintiffs, including Westlands Water District, San Benito County Water District, San Luis Water District, and Panoche Water District, filed suit claiming a violation of due process and a taking under the Fifth Amendment due to implementation of the CVPIA and the ESA; a violation of the National Environmental Policy Act of 1969, Pub. L. No. 91-190, 83 Stat. 852 (codified as amended in scattered sections of 42 U.S.C.) (the "NEPA"), due to implementation of CVPIA § 3406(b)(2); and an APA claim regarding the issuance of a biological opinion. An injunction was issued regarding the NEPA violation, which was

3/ Article 11 of the 1963 CVP contract contains language similar to the liability limitation language of Article 9(a) of the 1983 Contracts: "[B]ut in no event shall any liability accrue against the United States or any of its officers, agents, or employees for any damage, direct or indirect, arising from a shortage on account of errors in operation, drought, or any other causes." O'Neill v. United States, 50 F.3d 677, 684 n.2 (9th Cir. 1995), aff'g Barcellos and Wolfsen, Inc. v. United States, 849 F. Supp. 717 (E.D. Cal. 1993). Article 9(a) of the 1983 Contracts states: "Nevertheless, if a shortage does occur during any year because of drought, or other causes which, in the opinion of the Contracting Officer, are beyond the control of the United States, no liability shall accrue against the United States." Stockton East Contract art. 9(a); see also Central Contract art. 9(a). 5

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vacated by Westlands Water District v. National Resources Defense Council, 43 F.3d 457 (9th Cir. 1994). The federal district court denied the claims of intervening Area I landowners within the Westlands Water District on jurisdictional grounds, holding that they were not intended third-party beneficiaries of the CVP contract signed in 1963. The court also held that the reclamation statutes did not constitute contracts; that claims regarding appropriative water rights, trust, and surcharges were without merit; and that no waiver of sovereign immunity existed that permitted them to file suit against the United States. The remaining claims of plaintiffs were not reached, having been dismissed voluntarily by plaintiffs. Subsequently, the Ninth Circuit affirmed the determination that the Area I landowners were not intended third-party beneficiaries to the 1963 CVP contract and the finding that no waiver of sovereign immunity was present, rulings which were affirmed by the Supreme Court of the United States. See Orff v. United States, 358 F.3d 1137 (9th Cir. 2004), aff'd 545 U.S. 596 (2005). 3. Stockton East Water District v. United States, No. 93-5896 (E.D. Cal. filed Oct. 1, 1993).

Plaintiffs Stockton East, Central, City of Stockton, San Joaquin County, and California Water Service Company filed a complaint (1) requesting "[i]njunctive relief for violation of Fifth Amendment vested property rights and breach of contract;" (2) alleging "a NEPA violation [regarding] CVPIA implementation;" (3) arguing that "CVPIA § 3411(a) requires modification of [state water rights permits];" (4) alleging a violation of the APA by "arbitrary and capricious abuse of discretion by the United States in implementing the CVPIA;" and (5) pressing a taking in violation "of vested property rights under the [Fifth] Amendment and breach of contract." Joint Chart of Lawsuits and Regulatory Proceedings, filed Nov. 21, 2006, at 10. Plaintiffs filed an amended complaint that alleged (1) a violation of the Fifth Amendment Due Process Clause for allocation of 800,000 acre-feet of water under CVPIA § 3406(b)(2) and the formation of the 1994 Principles for Agreement; (2) a violation of APA by prescribing allocation of 800,000 acre-feet of water under CVPIA § 3406(b)(2); (3) a violation of state law, the CVPIA, and the APA for failing to obtain California state water permit modifications; (4) a violation of the APA and federal Reclamation law for using the New Melones Reservoir water outside the watershed in violation of California Water Code § 11460; (5) a violation of APA and federal Reclamation law based on non-beneficial use of water in violation of California Constitution Article X, § 2; and (6) a violation of the APA and federal Reclamation law for using New Melones water contrary to its State water permits. The trial court granted defendant's motion to dismiss regarding plaintiffs' takings claim, with leave to amend and without prejudice to bring that claim in the United States 6

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Court of Federal Claims. 4/ Westlands Water Dist. v. United States, 850 F. Supp. 1388 (E.D. Cal. 1994). Trial was required regarding the remaining federal law issues, Stockton E. Water Dist. v. United States, No. 93-5896 (E.D. Cal. Nov. 4, 1996, Dec. 4, 1996) (orders granting in part and denying in part cross-motions for summary judgment), and the court denied defendant's motion for summary judgment on interpretation of California Water Code § 11460 and claims four through seven of plaintiffs' amended complaint, Stockton E. Water Dist. v. United States, No. 93-5896 (E.D. Cal. Nov. 4, 1996, May 8, 1997) (orders denying summary judgment). The court declined to reach claims regarding violation of the APA through implementation of the CVPIA and transferred plaintiffs' breach of contract and takings claims to the Court of Federal Claims. Stockton E. Water Dist. v. United States, No. 93-5896 (E.D. Cal. Jan. 30, 2004) (order transferring fifth cause of action from October 1, 1993 complaint to Court of Federal Claims). The parties have agreed to stay further proceedings before the district court pending the outcome of several California State Water Resources Control Board ("State Water Control Board" or "Water Control Board") cases through March 2007. See Stockton E. Water Dist. v. United States, No. 93-5896 (E.D. Cal. Sept. 14, 2006) (order extending stay through March 21, 2007). 4. San Luis & Delta-Mendota Water Authority v. United States, No. 97-6140 (E.D. Cal. filed Nov. 21, 1997)

Plaintiffs and intervenors brought APA claims challenging the implementation of the CVPIA, which the district court bifurcated into two groups of issues, those dealing with yield calculations and accounting issues and those raising other issues. The trial court held that (1) the yield calculation was lawful; (2) the United States Department of the Interior ("Interior") was required to provide an accounting of (b)(2) yield annually; and (3) use of "offset/reset" accounting for (b)(2) water was arbitrary and capricious. San Luis & DeltaMendota Water Auth. v. United States, No. 97-6140, slip op. at 43 (E.D. Cal. Oct. 19, 2001); San Luis & Delta-Mendota Water Auth. v. United States, No. 97-6140, slip op. at 13-14 (E.D. Cal. Feb. 5, 2002). The Ninth Circuit affirmed the district court's findings regarding "offset/reset" and the yield calculation, but reversed, in part, concluding that the district court "erred in concluding that Interior lacks discretion to refrain from crediting the amount of Project yield actually used for any (b)(2) purpose against the designated 800,000 acre feet of Project yield." Bay Institute of San Francisco v. United States, 87 F. App'x. 637, 639 (9th Cir. 2004).

4/ Stockton East Water District v. United States, No. 93-5896, was consolidated, in part, with Westlands Water District v. United States, No. 93-5327. See Stockton E. Water Dist. v. United States, No. 93-5896 (E.D. Cal. Mar. 28, 1994) (order consolidating cases for motions to dismiss). 7

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5.

Firebaugh Canal Co. v. United States, No. 88-634 (E.D. Cal. filed Dec. 9, 1988), and Sumner Peck Ranch, Inc. v. United States, No. 91-048 (E.D. Cal. filed Jan. 31, 1991)

Landowners sued in consolidated actions to enforce a drainage requirement and for damages based on federal legislation authorizing the San Luis Unit of the CVP. The district court held that (1) the San Luis Act required construction of drain by Interior; (2) the duty to construct drain was not repealed by appropriations riders; (3) Interior violated the San Luis Act by deciding not to provide drainage; and (4) the agency was required to file an application for discharge permit and take other actions. See Firebaugh Canal Co. v. United States, 203 F.3d 568, 572-73 (9th Cir. 2000) (discussing district court's unpublished decisions). The Ninth Circuit affirmed in part and reversed in part in Firebaugh Canal Co., 203 F.3d 568, holding that the district court improperly mandated certain actions when the statute left the decision on how to comply within the discretion of the Secretary of Interior. Id. at 574, 578. 6. Natural Resources Defense Council v. Rodgers, No. 88-1658 (E.D. Cal. filed Dec. 21, 1988)

Environmental groups brought an action seeking to enjoin Reclamation from renewing water supply contracts, alleging violations of the NEPA and the ESA, as well as challenging operations of Friant Dam as being in violation of California Fish & Game Code § 5937. The district court held that Reclamation violated the ESA by renewing water contracts and dismissed the state law claim as unripe. See Natural Res. Def. Council v. Houston, 146 F.3d 1118, 1125 (9th Cir. 1998) (discussing district court's orders on appeal). The Ninth Circuit reversed, in part, ruling that the state law claim was ripe and upholding the violation of the ESA. Id. at 1131. On remand the district court held that California Fish & Game Code § 5937 (2006), applied to the operation of Friant Dam and that Reclamation had violated section 5937 by failing to release sufficient water for fisheries purposes. Natural Res. Def. Council v. Patterson, 333 F. Supp. 2d 906, 917, 924-25 (E.D. Cal. 2004). The trial court also held that biological opinions relating to the renewal of contracts were inadequate and in violation of the ESA. Natural Res. Def. Council v. Rodgers, 381 F. Supp. 2d 1212, 1229, 1232 (E.D. Cal. 2005). Subsequently, the parties reached a settlement, approved by the district court on October 23, 2006, to restore water flows for fisheries to the San Joaquin River below Friant Dam along with implementation of other restoration projects under the retained jurisdiction of the district court.

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7.

Central Delta Water Agency v. United States, No. 99-5650 (E.D. Cal. filed May 7, 1999)

Plaintiffs sought injunctive relief under the APA to prevent the release of water from the New Melones Reservoir under CVPIA § 3406(b)(2) until Reclamation had reserved water for release to meet the Vernalis salinity standards. Stockton East intervened as a plaintiff, claiming that Reclamation violated the APA by failing to comply with the terms of the 1987 Department of Fish and Game Agreement. The district court granted defendant's motion for summary judgment regarding the salinity standards claim, holding that plaintiffs had not presented evidence that Reclamation was in imminent danger of failing to meet the Vernalis salinity standard. Cent. Delta Water Agency v. United States, 327 F. Supp. 2d 1180, 1218 (E.D. Cal. 2004). The court dismissed Stockton East's claim without prejudice due to plaintiffs' failure to exhaust administrative remedies and the state's immunity to suit as an indispensable party. See Cent. Delta Water Agency v. United States, No. 99-5650 (E.D. Cal. Dec. 3, 2001) (amending order originally issued December 3, 2001, dismissing claim without prejudice). On appeal the Ninth Circuit affirmed, "find[ing] dispositive the absence of a genuine issue of material fact as to whether the Bureau will comply with the Vernalis Salinity Standard in the foreseeable future." Cent. Delta Water Agency v. Bureau of Reclamation, 452 F.3d 1021, 1023 (9th Cir. 2006). The court stated that "the Bureau lacks the discretion to violate the Vernalis Salinity Standard. However, the Act leaves to the agency's discretion the decision of how to comply with those standards." Id. at 1026. 8. Association of California Water Agencies v. United States, No. 00-6148 (E.D. Cal. filed Aug. 3, 2000)

Plaintiffs challenged the critical habitat designation of steelhead trout as unlawful under the ESA and the APA due to a failure to conduct an economic analysis. This case was rendered moot by another proceeding and the Government withdrew the critical habitat designation. 9. Modesto Irrigation District v. Evans, No. 02-6553 (E.D. Cal. filed Dec. 11, 2002)

Plaintiffs filed claim protesting listing of Central Valley Steelhead Trout as endangered in 1998 by the National Marine Fisheries Service (the "NMFS," now known as NOAA Fisheries) as unlawful under the ESA and the APA. The court held that the listing was unlawful and the listing was vacated. Modesto Irrigation Dist. v. Evans, No. 02-6553, 2006 WL 1376964 (E.D. Cal. 2006). 9

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10.

Modesto Irrigation District v. Gutierrez, No. 06-0453 (E.D. Cal. filed Apr. 14, 2006)

Plaintiffs filed a challenge of the NMFS listing of the Central Valley Steelhead Trout as an endangered species under the ESA as unlawful under the ESA and the APA. This case is still pending, with briefing on summary judgment scheduled for 2007. 11. United States v. California, 694 F.2d 1171 (9th Cir. 1982)

The United States commenced a declaratory judgment action regarding its ability to impound unappropriated water without the need to comply with state law. The claim "involved cross-claims by the State of California and the United States over whether and to what extent the State of California could condition the water rights of the United States for New Melones [R]eservoir as set forth in [] Decision 1422." Joint Chart of Lawsuits and Regulatory Proceedings at 17. The United States District Court for the Eastern District of California entered judgment in favor of the United States. United States v. California, 403 F. Supp. 874 (E.D. Cal. 1975). The Ninth Circuit affirmed with modifications, United States v. California, 558 F.2d 1347 (9th Cir. 1977), and the United States Supreme Court reversed and remanded, United States v. California, 438 U.S. 645 (1978). On remand the district court found that the prohibition of appropriation of water for hydropower purposes in Decision 1422 was void as contrary to congressional intent. United States v. California, 509 F. Supp. 867, 887-88 (E.D. Cal. 1981). The Ninth Circuit affirmed in part and reversed in part, holding that none of the conditions imposed by Decision 1422 was shown to be invalid and remanded to the district court. United States v. California, 694 F.2d 1171 (9th Cir. 1982). 12. State Water Resources Control Board Cases, Judicial Council Coordinated Proceeding No. 4118

Plaintiffs, including Stockton East and Central, filed an action seeking a writ of mandate against the State Water Resources Control Board. Plaintiffs challenged implementation of conditions on New Melones water right permits granted in Decision 1641 as unlawful or lacking record support. See State Water Res. Control Bd. Cases, 136 Cal. App. 4th 674, 753 (2006) (discussing County of San Joaquin v. State Water Res. Control Bd., No. 311499 (San. Fran. Cty. Super. Ct. filed Apr. 4, 2000)). The suit, which was coordinated

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with fourteen other lawsuits 5/, alleged (1) that California Water Code § 11460 6/ was violated by amending Reclamation's permits to impose salinity and flow objectives at Vernalis and Delta outflow objectives because the need was created by exports; (2) that Reclamation's use of water from the New Melones Reservoir to meet the Vernalis salinity objectives was unreasonable under California Constitution Article X, § 2; 7/ and (3) that the decision of the State Water Control Board to require releases from the New Melones Reservoir for salinity and flow objectives at Vernalis was unsupported by substantial evidence. The Superior Court of California for the County of San Francisco denied all of the plaintiffs' claims; this ruling was upheld on appeal. State Water Res. Control Bd. Cases, 136 Cal. App. 4th 674. The California Court of Appeal for the Third Appellate District found no violation of California Water Code § 11460: [I]f the terms of a permit issued by the Board give the Bureau a range of choices in operating the CVP­only one of which might violate section 11460­there is no basis for challenging the Board's decision based on section 11460. As long as the Bureau has the right under its permit to operate the CVP consistently with section 11460, any violation of the statute would result solely

5/ The allegations contained in the other parties' coordinated claims are not discussed in any detail as they are not relevant to the issues before the court. 6/ California Water Code § 11460 (2006), provides: In the construction and operation by the department of any project under the provisions of this part a watershed or area wherein water originates, or an area immediately adjacent thereto which can conveniently be supplied with water therefrom, shall not be deprived by the department directly or indirectly of the prior right to all of the water reasonably required to adequately supply the beneficial needs of the watershed, area, or any of the inhabitants or property owners therein. 7/ California Constitution Article X, § 2 provides, in relevant part: The right to water or to the use or flow of water in or from any natural stream or water course in this State is and shall be limited to such water as shall be reasonably required for the beneficial use to be served, and such right does not and shall not extend to the waste or unreasonable use or unreasonable method of use or unreasonable method of diversion of water. 11

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from the Bureau's actions, rather than from the Board's decision. Id. at 756. Additionally, the appeals court held that no violation of the reasonable and beneficial use doctrine from California Constitution Article X, § 2 occurred and the decision to impose salinity and flow standards at Vernalis on the New Melones Reservoir was not an abuse of discretion. Id. at 762. II. State and federal regulatory proceedings 1. Southern Delta salinity objectives in 1995 Water Quality Control Plan

In response to State Water Resources Control Board Cases, 136 Cal. App. 4th 674 (2006), the State Water Control Board began proceedings to study implementation and possible amendment of the southern delta salinity objectives mandated by the 1995 Water Quality Control Plan. A public workshop was scheduled to commence on January 16, 2007. 2. Hearings regarding amendment of 1995 Water Quality Control Plan

On November 13, 2006, the State Water Control Board held hearings regarding adoption of the amended Water Quality Control Plan for the Bay Delta. No decision has been reached regarding this petition. 3. Order Adopting Cease and Desist Order and Granting Petitions for Reconsideration, Cal. State Water Res. Control Bd., WR 2006-0006 (Feb. 15, 2006) ("WR 2006-0006")

The State Water Control Board issued a draft Cease and Desist Order (the "CDO") on May 3, 2005, pursuant to California Water Code § 1834(a), in response to a threat of a failure to implement a salinity goal requiring an electrical conductivity of 0.7 millimhos per centimeter at the Vernalis compliance station. The State Water Control Board adopted the CDO on February 15, 2006, in WR 2006-0006, imposing a schedule of corrective actions upon Reclamation and the California Department of Water Resources ("DWR"). WR 20060006 at 28-33. Both Reclamation and DWR have filed writ of mandate actions in state and federal court to set aside WR 2006-0006, which are unresolved. 4. State Water Resources Control Board Water Rights Applications

Stockton East currently has eleven applications filed with the State Water Control Board regarding appropriation of water and assignment of state applications for water appropriation from the Calaveras River, Littlejohns Creek System, and Stanislaus River. No 12

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decision on any of these applications has been rendered. FACTS I. Background

Plaintiffs are Stockton East Water District ("Stockton East"), Central San Joaquin Water Conservation District ("Central"), City of Stockton, County of San Joaquin, and California Water Service Company ("California Water"). These entities are involved with the provision or use of municipal, industrial, and agricultural water, as well as the operation and maintenance of water facilities within California's San Joaquin Valley. This case involves a dispute over the 1983 Contracts involving Stockton East, Central, and the United States Bureau of Reclamation ("Reclamation") for the appropriation of water from California's New Melones Dam. See Contract Between the United States and Stockton East Water District Providing for Project Water Service (the "Stockton East Contract"); Contract Between the United States and Central San Joaquin Water Conservation District Providing for Project Water Service (the "Central Contract"). Plaintiffs protest that Reclamation reduced water allocations between 1993 and 2004 below required amounts in violation of the terms of the 1983 Contracts. 8/ Plaintiffs assert that (1) Reclamation breached the 1983 Contracts by reducing water allocations below contract requirements and no portion of the contracts excuses these reductions; and (2) Reclamation did not operate the New Melones Reservoir in a manner that used "all reasonable means to guard against shortage" in violation of Article 9(a) of the 1983 Contracts. Defendant responds that (1) any reduction in water allocation was excused by the terms of the 1983 Contracts; (2) the operational decisionmaking of Reclamation did not violate the "all reasonable means to guard against shortage" requirement; and (3) even if a violation is found under the contracts, it would be excused by invocation of the sovereign acts and unmistakability doctrines. The factual background of this case was recited previously in this court's denial of defendant's motion to dismiss, Stockton E. Water Dist. v. United States, 62 Fed. Cl. 379, and in this court's opinion regarding cross-motions for summary judgment, Stockton E. Water Dist. v. United States, 70 Fed. Cl. 515, and will be repeated only as necessary. The United States Supreme Court rendered an excellent history of western water rights, up to and including the formation of the New Melones Dam. See California v. United States, 438 U.S. 645 (1978). The history provides background information relevant to plaintiffs' claims, but need not be repeated here, other than to place in context this dispute by reference to what the

8/ Trial was limited, at the request of the parties, to liability, with the amount of recovery subject to further proceedings. See Order entered Oct. 27, 2004, ¶ 1. 13

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Supreme Court described as: The final expansion of our Nation in the 19th century into the arid lands beyond the hundredth meridian of longitude, which had been shown on early maps as the "Great American Desert," brought the participants in that expansion face to face with the necessity for irrigation in a way that no previous territorial expansion had. Id. at 648. 1. Identification of the parties

Plaintiff Stockton East is the signatory to one of the two 1983 Contracts with Reclamation. Stockton East is a public agency in San Joaquin County, created by Special Act of the California Legislature on September 29, 1971. 1971 Cal. Stat. ch. 819 (the "Special Act"). Section 3 of the Special Act provides: (a) The Legislature finds and declares that the problems of providing for the management of the underground water basin and the provision of supplemental water supplies, in the area of [Stockton East] are peculiar to that district and that area and for that reason it is necessary to deal specially with such area and to provide special provisions for the government and operation of that district. (b) The Legislature further finds and declares that this act is necessary to the solution of a problem arising out of the following unique and special circumstances: The water supplies in the underground basin in the area of [Stockton East] are insufficient to meet the water demands of the area, and, because . . . excessive pumping has seriously depleted the underground water storage, there has been an intrusion of saline waters into the underground water basin . . . . Further excessive pumping, without proper management . . . is certain to destroy the usefulness of a major portion of the underground water basin. Special Act at 1-2. Plaintiff Central is the signatory to the second 1983 Contract with Reclamation (the "Central Contract"). Central is a water conservation district organized under the California Water Code, §§ 74000-76501 (2000), formed with the specific purpose of contracting with the Central Valley Project. Joint Stipulations ¶ 2. Central also is located in San Joaquin 14

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County, but to the south of Stockton East. Central, like Stockton East, overlies a groundwater basin that is in a state of severe overdraft and salinity intrusion, limiting one possible source of water, groundwater pumping, to the area. Plaintiffs California Water, City of Stockton, and San Joaquin County (collectively the "Urban Contractors") claim third-party beneficiary status to the 1983 Contracts. 9/ California Water is a corporation organized and existing under the laws of the State of California that contracts for a portion of Stockton East's treated water and then provides that treated water to the residents of the city of Stockton, pursuant to the terms of the Second Amended Contract, which was executed between the Urban Contractors and Stockton East on September 25, 1983. DX 248. The City of Stockton is a municipal corporation organized under California Government Code §§ 34000-45345 (2006). Joint Stipulations ¶ 4. San Joaquin County is a political subdivision of the State of California organized under California Government Code §§ 34000-33205 (2006). Joint Stipulations ¶ 3. Both the City of Stockton and San Joaquin County also contract for water through Stockton East. Reclamation is a federal agency that administers the New Melones Dam and its allocations of water. The New Melones Dam is managed as part of the Central Valley Project, a federal reclamation project authorized by the Flood Control Acts of 1944 and 1962 and the CVPIA. See Flood Control Act of 1944, Pub. L. No. 78-534, § 10, 58 Stat. 887, 90002; Flood Control Act of 1962, Pub. L. No. 87-874, § 203, 76 Stat. 1173, 1191-92 ("Flood Control Act of 1962"); CVPIA. The New Melones Dam is located on the Stanislaus River approximately sixty miles upstream from the confluence of the Stanislaus with the San Joaquin River and forty miles east of Stockton, California, and has a capacity of 2.4 million acre-feet of water. Surface water trapped by the New Melones Dam is stored in the New Melones Reservoir and then sent via channel to the Tulloch Reservoir, which empties into the Goodwin Pool. Water from the Goodwin Pool then is sent via channel to the Oakdale and South San Joaquin Irrigation Districts, to Stockton East and Central (collectively, the "Contracting Parties") via the Goodwin Tunnel and Farmington Canal, or over the dam to spill into the San Joaquin river for fisheries, salinity, and flood release purposes. See Transcript of Proceedings, Stockton E. Water Dist. v. United States, No. 04-541L, at 810-14 (Fed. Cl. Oct. 23 - Nov. 2, 2006) ("Tr.").

9/ The court granted defendant's motion for summary judgment, in part, ruling that the Urban Contractors were not third-party beneficiaries to the Central Contract. See Summ. J. Op. at 536 ("Plaintiffs do not appear to dispute the fact that [the Urban Contractors] are not third-party beneficiaries to the Central Contract, as distinct from the Stockton East Contract. Therefore, defendant's cross-motion to disallow those three plaintiffs from enforcing the Central Contract is granted."). 15

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2.

Chronological overview of the dispute

In 1962 Congress authorized the construction of the New Melones Dam, and construction was completed in 1978. Before the reservoir could be filled, however, the Federal Government was obliged to apply for and receive appropriate permits from the State of California (the "State"). These permits were acquired in 1973, but the Federal Government disputed whether it was obligated to follow demands put upon it by the State. One of the conditions with which the Federal Government had to comply in order to fill the reservoir required the Government to commit a certain amount of water­the quantity set by the State­to fish and wildlife uses. Another condition stipulated that the Federal Government must have firm commitments from entities that would use the New Melones Reservoir water before filling the reservoir. In order to fulfill the requirements of the State, Reclamation entered into negotiations with and received commitments from the Contracting Parties for consumptive use of surface water from the New Melones Reservoir. Reclamation then began filling the New Melones Reservoir, which was completed in 1983. On December 19, 1983, Reclamation entered into separate contracts with Stockton East and Central for delivery of certain quantities of water from the New Melones Reservoir, subject to compliance with several conditions. In 1993 the CVPIA became effective. This law increased the amount of water that Reclamation must release for environmental purposes and changed the priorities by which water allocation decisions were made. Because of these changes in environmental law, Reclamation was required to release more water for fish and water quality needs, and this, at least in part, contributed to the fact that the Contracting Parties received less water. The Contracting Parties argue that these increased delivery obligations resulted in Reclamation reducing deliveries of water below that which was required by the terms of the 1983 Contracts, and that Reclamation operated the New Melones Reservoir in a manner that did not fulfill Reclamation's contractual obligation to "use all reasonable means to guard against shortage" to the Contracting Parties. II. Requirements of law and regulation existing prior to and leading up to the 1983 Contracts 1. The Central Valley Project

The Central Valley Project (the "CVP") is a water conservation project that was built to serve various water needs in the Central Valley Basin. The CVP was first authorized by the Rivers and Harbors Act, Pub. L. No. 74-409, 49 Stat. 1028, 1048 (1935); the Emergency Relief Appropriation Act of 1935, Pub. L. No. 74-11, 49 Stat. 115; and the First Deficiency 16

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Appropriation Act, Pub. L. No. 73-739, 49 Stat. 1622 (1936); see also Rivers and Harbors Improvement Act authorizing the construction, repair, and preservation of certain public works on rivers and harbors, and for other purposes, Pub. L. No. 75-392, 50 Stat. 884 (1937); Reclamation Act of 1902, 32 Stat. 388 (codified as amended in scattered sections of 43 U.S.C. (2000)). The CVP consists of twenty reservoirs, eleven power plants, over 500 miles of major canals, and includes over 250 water-service contracts for agricultural and municipal and industrial ("M&I") use. The New Melones Reservoir and Dam are part of the CVP system, and the 1983 Contracts are among the water service contracts managed by Reclamation within the CVP. The Ninth Circuit described the CVP in Westlands Water District v. Natural Resources Defense Council, 43 F.3d 457, stating: California's Central Valley is one of the most fertile agricultural regions in the United States. Several state and federal water projects, including the federal Central Valley Project, make this agricultural productivity possible by diverting water from streams that flow out of the Sierra mountains. These water projects produce many agricultural and economic benefits, but the water diversions harm wildlife habitats and ecological resources. In addition, agricultural water users consume most of California's developed water yet comprise only a small fraction of California's population. As urban populations continue to grow, urban water users are demanding more water. Id. at 459. 2. The New Melones Reservoir

The Flood Control Act of 1944, 58 Stat. 887, authorized a "plan of improvement for flood control and other purposes on the Lower San Joaquin River and tributaries," allocating "$8,000,000 for initiation and partial accomplishment of the plan." Id. at 901. Congress's later modification of the Flood Control Act directed that Reclamation construct and operate the New Melones Dam "pursuant to the Federal reclamation laws." Flood Control Act of 1962, § 203. On June 25, 1962, the Secretary of the Army transmitted a Letter captioned, "New Melones Project, Stanislaus River, California" to the California House Committee on Public Works. H.R. Doc. No. 453, 2d Sess. (Cal. 1962) ("House Document 453"). House Document 453 contained the "views and recommendations" of "the Department of Water Resources . . . together with the comments of the Department of Fish and Game, the Division of highways, the State Reclamation Board, and the Department of Conservation." Id. at xi. 17

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The Comments of the California Department of Water Resources to House Document 453 recognized that "the New Melones project was authorized by the Flood Control Act of 1944 at a storage capacity of 450,000 acre-feet, with provisions for possible future enlargement to 1,100,000 acre-feet." Id. at xiii. In addition, the Report from the U.S. Army Corps of Engineers concluded: "The District Engineer finds, after joint studies with [Reclamation], that the New Melones Project, to provide a gross storage capacity of about 2,400,000 acrefeet . . . , is needed for full development and maximum utilization of the water resources of the Stanislaus River basin." Id. at 8. On October 23, 1962, Congress authorized the expansion of the New Melones Dam, Pub. L. No. 87-874, 76 Stat. 1173 (1962), by modifying the New Melones project "substantially in accordance with the recommendations of [House Document 453]." Act of October 23, 1962, 76 Stat. 1191. The authorization, however, was predicated upon certain conditions, which include a requirement that before initiating any diversions of water from the Stanislaus River Basin in connection with the operation of the Central Valley [P]roject, the Secretary of the Interior shall determine the quantity of water required to satisfy all existing and anticipated future needs within that basin and the diversions shall at all times be subordinate to the quantities so determined: Provided further, That the Secretary of the Army adopt appropriate measures to insure the preservation and propagation of fish and wildlife in the New Melones project and shall allocate . . . an appropriate share of the cost of constructing the same. Id. The California Department of Finance filed applications with the Water Control Board in 1952 for permission to appropriate water from the Stanislaus River in connection with the New Melones dam and reservoir development. Reclamation was assigned these applications for irrigation, domestic, municipal, industrial, fish culture, recreation, water quality control, and hydroelectric uses. In 1960 Reclamation filed applications in connection with a proposal to expand the size of the New Melones Reservoir for additional appropriations. These applications were the subject of a decision issued by the State Water Control Board in 1973. New Melones Project Water Rights Decision, Cal. State Water Res. Control Bd., Decision 1422 (Apr. 14, 1973) ("Decision 1422"). Decision 1422 approved, in part, the applications for expanded appropriation of water for the New Melones Reservoir. Id. 3. Senior water rights

In 1972 Reclamation entered into an Agreement and Stipulation with Oakdale 18

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Irrigation District ("OID") and South San Joaquin Irrigation District ("SSJID"). This agreement provided OID and SSJID with: That portion of the New Melones Reservoir inflow required to meet the Districts' direct diversion requirements but not to exceed 1,816.6 cubic feet per second. Subject to the following limitation: The maximum quantity of water delivered each year is limited to 654,000 acre-feet or the total quantity of New Melones Reservoir inflow during the water year . . . , whichever is the smaller. DX 3 at 2. The agreement recognized the senior water rights of OID and SSJID and required Reclamation to supply up to 654,000 acre-feet annually from the New Melones Reservoir. A second Agreement and Stipulation in 1988 superceded the 1972 Agreement and Stipulation. The second Agreement and Stipulation, executed on August 30, 1988, between Reclamation, OID, and SSJID, required Reclamation to deliver "each water year to [OID and SSJID] for diversion at Goodwin Diversion Dam . . . . The inflow to New Melones plus the amount derived by the following formula: (600,000 - inflow) divided by 3; limited to a maximum entitlement of 600,000 acre-feet of water each water year." DX 41 at 1. In addition, the 1988 Agreement and Stipulation requires Reclamation to make available a preliminary forecast in February and March and to furnish a forecast in April predicting inflow to the New Melones Reservoir. Paragraph 4 of the Agreement and Stipulation provides that "The Districts' conserved water may be stored in New Melones Reservoir up to a cumulative total amount of 200,000 acre-feet." Id. at 2. The Decision of the State Water Control Board in January 1988 acknowledged the existence of senior water right holders in authorizing partial filling of the New Melones Reservoir: "This permit is subject to prior rights. Permittee is put on notice that during some years water will not be available for the diversion during portions or all of the season authorized herein." Petition for Assignment of Application 14858 and Applications 27319, 27320 and 27321 of the U.S. Bureau of Reclamation Stanislaus River, Cal. State Water Res. Control Bd., Decision 1616 at 34 (Jan. 1988) ("Decision 1616").

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4.

State Water Control Board requirements 1) Firm commitments

The Reclamation Act of 1902 § 8 requires Reclamation to apply for appropriate state permits. See California v. United States, 438 U.S. 645, 652 (1978). The controlling state water-control entity is the State Water Control Board, which possesses the power to issue appropriative water permits in California. See Cal. Water Code § 1201. The Water Control Board granted Reclamation the required permit, but imposed twenty-five conditions on Reclamation if it wished to appropriate the water to fill the Reservoir. 10/ See Decision 1422. The second condition to the permit authorized by Decision 1422 provided for limited filling of the New Melones Dam, but denied Reclamation's request for recreational and hydroelectric use: Until further order of the [Water Control Board], permittee shall impound in New Melones Reservoir only such water as is necessary to provide (a) not in excess of 98,000 acre-feet per annum for the preservation and enhancement of fish and wildlife to be released at a rate specified by the California Department of Fish and Game, plus (b) such additional water as is necessary to maintain . . . water quality conditions . . . . The above amounts are in addition to water stored for satisfaction of prior rights at existing Melones Reservoir and for flood control. No additional impoundment shall be allowed for power and recreational uses. Decision 1422 at 30. Condition 2 also required that Reclamation must demonstrate firm commitments or a specific plan for consumptive use before Reclamation could appropriate fully the water. See California, 438 U.S. at 652. Condition 2 provided: Further order of the Board shall be preceded by a showing that the benefits that will accrue from a specific proposed use will outweigh any damage that would result to fish, wildlife and recreation in the watershed . . . and that the

10/ This decision sparked the litigation in California v. United States, 438 U.S. 645 (1978), wherein the United States Supreme Court ultimately ruled that the Federal Government must comply with the state-imposed conditions. 20

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permittee has firm commitments to deliver water for such other purposes. Decision 1422 at 30. "[T]he Board, in effect, said to [Reclamation], `Show us your contracts and your ability to deliver the water and it may be available to you.'" United States v. Cal. State Water Res. Control Bd., 694 F.2d 1171, 1177 (9th Cir. 1982) (quoting United States v. California, 509 F. Supp. 867, 886 (E.D. Cal. 1981)). In response to a submission by Reclamation, the Water Control Board in 1980 noted that "the reason for limiting storage in the [New Melones] reservoir was the failure of the permittee to show how and where the portion of the project yield intended for consumptive purposes would be used." Order Conditionally Accepting and Approving in Part Submittals by U.S. Water and Power Resources Service in Accordance with Condition 3 of Decision 1422, Cal. State Water Res. Control Bd., WR 80-20 at 6 (Nov. 20, 1980) ("WR 80-20"). The Water Control Board concluded that a "maximum amount of 438,000 acre-feet . . . , is accepted for satisfaction of prior rights, preservation and enhancement of fish and wildlife, and water quality until one of the alternative preconditions to full implementation of the Agreement and Stipulation occurs." Id. at 17. The Water Control Board denied a petition for reconsideration of WR 80-20 on January 14, 1981. Order Denying Petition for Reconsideration of and Clarifying Order WR 80-20, Cal. State Water Res. Control Bd., WR 81-1 (Jan. 14, 1981). In part to demonstrate such plans or commitments for consumptive use, Reclamation entered into contract negotiations with Stockton East and Central for the use of some of the New Melones water. These negotiations aided Reclamation in receiving approval from the State Water Control Board to appropriate water for the New Melones Reservoir. The Water Control Board stated in 1983 that by requiring "firm commitments" the Board intended that the permittee demonstrate that it has a specific plan to use the water from New Melones Reservoir for consumptive purposes. While executed contracts would provide strong evidence that firm commitments exist, the Board did not intend that existence of such contracts be the exclusive means of showing firm commitments for New Melones water. Rather, the Board intended that the Bureau show a specific plan under which the conserved water will be used consumptively. Order Amending Water Right Decision 1422 Authorizing Storage in New Melones Reservoir for Generation of Hydroelectric Power & for Consumptive Uses, Cal. State Water Res. Control Bd., WR 83-3 at 18 (Mar. 8, 1983) ("WR 83-3"). The Water Control Board considered the "substantial steps" taken by Reclamation "toward executing contracts with 21

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. . . [Central] for 80,000 acre-feet, and [Stockton East] for 75,000 acre-feet" and concluded that "the permittee has established that it has firm commitments to deliver the full yield of New Melones water for consumptive uses. Furthermore, the evidence establishes that there is presently much more demand for New Melones water than the reservoir's yield." Id. at 19-20. The Water Control Board modified Condition 1-d of Decision 1422 to permit up to 1,420,000 acre-feet of water storage to be "used for irrigation, domestic, municipal, industrial, preservation and enhancement of fish and wildlife, recreation and water quality control purposes" and granted Reclamation "nonvested usufructuary rights to appropriate at New Melones, to the full capability of the project." Id. at 26-27. Nevertheless, the State Water Control Board again reserved jurisdiction to make changes, providing that "[a]ny deliveries of water which [Reclamation] may make for consumptive uses are subject to changes in [Reclamation's] water right permits which may, in the future be made pursuant to Condition 6. Such changes could include increases in the flows required for maintenance of water quality and for fish releases." Id. at 22. 2) Initial fish and wildlife releases

The State Water Control Board imposed a requirement upon Reclamation to dedicate a portion of the estimated 2.4 million acre-feet of potential reservoir water for environmental purposes. Initially, the Water Control Board mandated that 98,000 acre-feet of water be released annually for fishery and wildlife purposes, which could be reduced to 69,000 acrefeet in dry years. Decision 1422 at 21. In addition, the Water Control Board dictated that an amount of water be released that was sufficient to dilute the lower San Joaquin River flow to a dissolved solids level of 500 parts per million or less (the "salinity standard"). Id. at 11. The Water Control Board estimated that meeting this stipulation would require an annual release of not more than 70,000 acre-feet of water. Id. In both circumstances the Water Control Board reserved jurisdiction in Condition 6 "for the purpose of revising water release requirements for water quality objectives and fish releases." Id. at 32. Increasing demand for fish and wildlife releases was acknowledged by the Stanislaus River Basin Alternatives and Water Allocation Special Report (the "1980 Special Report") published by Interior, where it reported: In hearings before the State Water Resources Control Board in December 1972 . . . , it was revealed that the California Department of Fish and Game had

22

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concluded that increased flows would be needed for the anadromous [11/] fishery over those flows provided . . . almost the entire yield of New Melones Reservoir. If such flows were provided from New Melones, the project would then be unable to meet the agricultural and municipal and industrial water requirements as authorized which would severely impact justification of the entire project. New Melones Unit, U.S. Dep't of the Interior, Central Valley Project - California, Stanislaus River Basin Alternatives and Water Allocation Special Report 61-62 (1980). 3) In-basin needs

In addition to complying with the requirements of the Water Control Board, the Flood Control Act of 1962 required Interior to "determine the quantity of water required to satisfy all existing and anticipated future needs within the [Stanislaus River] [B]asin . . . ." § 203, 76 Stat. at 1191. The in-basin needs were deemed superior to other uses for the water. Id. The 1980 Special Report contained three alternative basins, four alternative storage operating conditions, and six alternative plans. 1980 Special Report at 1. Interior estimated that "[w]ith a gross reservoir capacity of 2,400,000 acre-feet and a minimum pool of 300,000 acre-feet at elevation 808 feet, an estimated 180,000 acre-feet of new water supply would be provided to serve the needs of the Stanislaus River Basin and other possible CVP service areas." Id. at 2. The 1980 Special Report also indicated that a "storage reservation of 450,000 acre-feet and a downstream channel flow of 8,000 ft3 /s would provide flood protection." Id. at 3. Reclamation issued its Record of Decision on June 29, 1981, relying upon the 1980 Special Report and a final supplement to the environmental statement dated September 12, 1980. Memorandum from the Sec'y, U.S. Dep't of the Interior to the Deputy Assistant Sec'y - Land and Water Res., U.S. Dep't of the Interior (May 15, 1981); PX 15. The Record of Decision contained the Commissioner of Reclamation's recommendation to the Secretary to adopt the in-basin area as defined by the second alternative proposed in the 1980 Special Report. Id. at 1. After meeting these requirements, Interior anticipated that sufficient water would remain to supply certain amounts to Stockton East and Central, recommending that

11/ "Anadromous" is a type of fish "that is born in freshwater -- i.e., lays its eggs in a water or a freshwater system -- and then generally, as juveniles or yearlings, migrates down the river to the ocean." Tr. at 1677 (testimony of Roger O. Guinee, Supervisory Fish and Wildlife Biologist for the United States Fish & Wildlife Service's Sacramento office).

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[t]he interim water supply of 85,000 acre-feet in year 2000 would be allocated on a conjunctive use basis to [Central], [Stockton East], and the South Delta Water Agency. The interim water supply would be available first to [Central] and then to [Stockton East] in wet, above normal, normal, and below normal water years . . . . In dry and critically dry water years [Central] could pump groundwater as replacement water for the interim water supply. Id. at 1. 5. Basis of Negotiation

On February 1, 1982, Interior approved a Basis of Negotiation for water service contracts from the New Melones Reservoir. PX 20 at 00343. The Basis of Negotiation included the figures from the Record of Decision, stating that "New Melones Reservoir will be operated as authorized at the full maximum capacity of 2,400,000 acre-feet and would provide 180,000 acre-feet of conservation yield to meet present and future agricultural and municipal and industrial (M&I) water needs until approximately the year 2020." Id. at 00345. The Basis of Negotiation included a chart of proposed operations at New Melones, which included: New Melones Reservoir Operations Reservoir Use Maximum storage level . . . . . . . . . . . . . Flood control space . . . . . . . . . . . . . . . . Conservation yield in year 2020 . . . . . . . Annual releases, if needed, to meet water quality criteria up to . . . . . . Fishery releases - normal years . . . . . . . Fishery releases - dry years . . . . . . . . . .

Acre-Feet 2,400,000 450,000 180,000 70,000 98,000 69,000

Id. Reclamation relied on these figures in negotiating the 1983 Contracts with Stockton East and Central. III. The 1983 Contracts

On December 19, 1983, Reclamation signed separate, but almost identical, contracts with Stockton East and Central. The 1983 Contracts provided for the supply of certain quantities of water on an annual basis, although the proper interpretation of these contracts is at the heart of the current dispute. The Summary Judgment Opinion addressed many of the portions of the 1983 Contracts; only the portions of the 1983 Contracts relevant to 24

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resolution of this dispute are analyzed further in this opinion. See Summ. J. Op. at 519-25. IV. Subsequent changes in laws and regulations

At the time the contracts were signed in 1983, the State Water Control Board anticipated that the annual fishery release from the New Melones Reservoir would be 98,000 acre-feet (or 69,000 acre-feet in dry years). Decision 1422 at 30. Amendments to federal Reclamation law revised upwards the goals for fisheries and environmental releases, and state water use permit changes modified salinity standards in the CVP. Looking at the operation of the overall system as a whole, the ever-increasing imposition of additional obligations for salinity and fisheries water releases led to a clash of management objectives and priorities, the unpredictability of available water supply, and an inherent conflict between demands for consumptive use by plaintiffs and environmental concerns. The over commitment of the New Melones Reservoir in spite of low inflow rates required Reclamation to make operational decisions regarding the allotment of scarce surface water resources. Resolution of plaintiffs' breach of contract claim contemplates discussion of the applicability of these obligations and the operation of the New Melones Reservoir. A recitation of the circumstances that led to the water release obligations therefore is instructive. 1. CVPIA

Passage of the CVPIA in 1993 made major changes to the allocation of water from the New Melones Reservoir. The purpose of the CVPIA was, in part, to protect, restore, and enhance fish, wildlife, and associated habitats in the Central Valley and Trinity River basins of California; to address impacts of the [CVP] on fish, wildlife, and associated habitats . . . ; [and] to achieve a reasonable balance among competing demands for