San Carlos Irrigation and Drainage District v. The United States, Defendant/cross-Appellant
Docket: 95-5105
Court: Court of Appeals for the Federal Circuit; June 18, 1997; Federal Appellate Court
San Carlos Irrigation and Drainage District (SCIDD) appealed a February 24, 1995 judgment from the United States Court of Federal Claims regarding damage awards on its claims against the United States. The government cross-appealed the damage award. Following oral arguments on October 10, 1996, the Federal Circuit affirmed the lower court's decisions, agreeing with the proper grant of summary judgment against certain claims and the correct interpretation of the contract between SCIDD and the government concerning other claims and damages.
The litigation stems from the 1924 congressional authorization for the construction of the Coolidge Dam in Arizona, part of the San Carlos Irrigation Project aimed at providing irrigation to the Pima Indian Reservation and surrounding lands while preserving water supply for Indian lands. The Dam facilitated irrigation for 80% of the Project's lands, with the remaining areas relying on alternative water sources. Under a "Repayment Contract" established in accordance with the 1924 Act, SCIDD was to repay about half of the construction debt over twenty years, though subsequent legislation ultimately forgave this debt. Additionally, off-reservation irrigators were mandated to pay a share of annual operation and maintenance costs in advance. The case references multiple prior opinions detailing its extensive procedural history.
In 1928, Congress authorized the Secretary of the Interior to develop hydroelectric power at the Dam, contingent upon a repayment contract. The construction costs were to be recouped through Project revenues, while operational and maintenance (O. M.) costs would be funded through power sales. The Secretary was permitted to sell "surplus" power and allocate the "net revenues" for reimbursing power development costs, Project expenses, and O. M. charges. The 1946 Act modified the revenue allocation from a ranking to a list of permissible uses. The Secretary was also mandated to provide low-cost power for certain facilities on the San Carlos Reservation and could sell surplus power at his discretion.
In 1931, the Secretary entered a Contract with SCIDD, detailing repayment and water/power management. The Contract required equitable water distribution and made SCIDD responsible for O. M. charges. Profits from "excess water" sales were to reduce O. M. costs. The Secretary was to supply at-cost power to Reservation facilities and use net revenue from surplus power to lower beneficiaries' payments as per the 1928 Act. The Contract did not impose further restrictions on the Secretary.
In 1938, a Joint Works Order was issued, defining the Coolidge Dam, San Carlos Reservoir, and associated electrical systems. The Project landowners were responsible for operational costs, excluding the electric generation plant. The Joint Works functioned without significant issues until 1983, with minor problems occurring previously. The Power Division generated power and purchased additional low-cost power as needed. However, excessive pumping led to a declining water table, increasing the demand for pumping power for irrigation, which outstripped the Coolidge Dam's output in the years prior to the current litigation.
In October 1983, a storm caused the San Carlos Reservoir to overflow, leading to the inoperability of the spillway gates, which would have otherwise prevented additional water spillage. This overflow caused the foundation under the electric switchyard to settle, necessitating a shutdown of power operations. From 1983 to 1985, small spills continued while the Department of the Interior rehabilitated the power plant, sourcing power from federal hydro-power and commercial suppliers. In May 1982, the Area Director set operational rates for fiscal 1984 that included charges for power to operate pumps, a proposal initially suggested in a 1953 GAO audit but previously rejected. Charges from fiscal 1984 to 1990 were based on estimated costs for power production at Coolidge Dam and market purchases, with subsequent rates in 1991 and 1992 relying on lower costs from Parker-Davis power.
SCIDD filed a lawsuit on July 28, 1986, for damages related to water and hydroelectric power loss. The Claims Court dismissed the initial complaint, but an appellate court found the government had a contractual duty to maintain the Dam and its systems. On remand, the Claims Court ruled the government was not liable for loss of storable water, asserting SCIDD received its contractual water allocation. However, it acknowledged SCIDD's entitlement to "at-cost" pumping power. Following trial, SCIDD was awarded $667,021 for overcharges, later revised to $770,900.
SCIDD is appealing the summary judgment on water loss damages and the power charge calculations, claiming the Claims Court erred by allowing the government to charge for replacement power despite its malfeasance and by using the Parker-Davis rate instead of historical Coolidge Dam costs. The government cross-appeals, arguing SCIDD is not entitled to any recovery for excess power charges due to failure to exhaust administrative remedies and challenges the validity of the overcharge award.
SCIDD claims entitlement to damages for water loss due to malfunctioning spillway gates, arguing that the Bureau of Indian Affairs breached its contractual duty to maintain the Dam. SCIDD's argument outlines that: (i) the breach resulted in reduced water storage; (ii) the 1931 Contract stipulates that all captured water must benefit the District and local Indians; (iii) therefore, the United States is liable for lost water that would have benefited landowners. SCIDD emphasizes the Contract's provisions requiring equitable distribution of water for the Project's benefit. The government counters, asserting a distinction between "excess" water and the basic annual allocation, claiming no obligation to maximize carryover storage or reserve excess water exclusively for irrigators. The government maintains that it can allocate excess water to both Project and off-Project users and that SCIDD irrigators received adequate water post-spills, asserting landowners were not damaged in 1990 when more water could have been used. The Contract specifies that losses in Project canals are to be absorbed by the project as a whole. Relying on case precedents, the government argues for deference to the Secretary's discretion in water allocation, maintaining that the only vested rights arise from the annual allocation estimate, which has been met yearly despite its decline. The Claims Court upheld that the government met its obligation to provide water, as stated in SCIDD IV, and the summary judgment on water claims is subject to review for genuine material fact issues. The government, as the moving party, bears the burden of proving the absence of such issues.
The court upheld the grant of summary judgment, acknowledging the negligent loss of water due to inoperable spillgates but determining that the damages claimed by SCIDD were too speculative to establish contractual liability against the government. The court did not address the Claims Court's reasoning that the government was only obligated to deliver an annual water allotment, which it fulfilled each year, thereby capping its liability. Key to the ruling is the principle that damages for breach of contract must be non-speculative and directly tied to the breach. The court emphasized that recovery for remote and consequential damages is not permitted in breach of contract actions against the United States. SCIDD's claims, that inadequate water allocations were a result of spillgate malfunctions and that lost surplus water could have generated revenue, failed to meet the requirement of demonstrating that the damages would not have occurred but for the breach. The contract allows the Secretary discretion in water allocation and does not mandate profit generation from surplus water sales to offset SCIDD's operational and maintenance charges. SCIDD conceded that water allocation levels were adequate from 1983 through 1988, undermining its argument that water in the dam during wet years would have alleviated shortages in subsequent dry years.
SCIDD failed to demonstrate that it would have gained a material benefit from operable spillgates, as it could not prove that the breach caused a shortage of water nine years later. Various contingencies, particularly the agency's discretion in water disposal, disrupt the causal link between the breach and SCIDD's alleged water deficiency in 1989-90. The court rejected SCIDD's argument that the absence of damages against the United States rendered the prior decision in SCIDD II ineffective, emphasizing that not all contract breach injuries are compensable. The court noted that had the government not met its water allocation in the immediate years post-flood, SCIDD may have established a clearer connection to the breach. However, the current allegations do not sufficiently link the spillgate malfunction to SCIDD's injury. The SCIDD II decision addressed only the government’s duty to maintain the spillways, leaving unresolved questions regarding breach, causation, and damages for trial. The government is cross-appealing a $770,900 damage award to SCIDD, which was based on a ruling that the Interior Department's projected groundwater pumping costs were excessive. The government argues that SCIDD did not exhaust administrative remedies regarding the O. M. ratemaking process, asserting that this failure bars SCIDD from contesting final agency actions under the Administrative Procedure Act. The government contends that the Contract mandates SCIDD to follow specific administrative procedures to challenge the O. M. rates.
Interpretation of contract terms is a legal issue reviewed de novo. The court disagrees with the government's interpretation regarding Operation and Maintenance (O. M.) charges, which are stated to be announced by the Secretary of the Interior but are subject to limitations within the contract, including a requirement that charges reflect actual operating costs. The government failed to demonstrate that the Administrative Procedure Act (APA) applies to the determination of replacement power costs. SCIDD claims a breach of contract under the Tucker Act, asserting the government did not fulfill its obligation to provide power at cost. The court found no compelling evidence in the contract to support the government's argument that SCIDD must exhaust administrative remedies before bringing its claim. SCIDD's assertion of a deprived contractual right to pumping power at cost is suitable for judicial resolution and does not warrant barring the claim in the Claims Court. The exhaustion doctrine is not strictly jurisdictional; unless required by statute, regulation, or contract, the necessity of pursuing administrative remedies is left to the court's discretion.
The core issue revolves around whether the Interior and the Bureau of Indian Affairs can charge SCIDD for pumping power when the Dam is non-operational due to flooding. SCIDD contends that Congress intended for the project’s power facility to be self-sustaining, with its charges limited to construction and operation and maintenance (O. M.) costs, implying that these were solely for building and maintaining the irrigation system rather than for delivering non-surplus power. SCIDD argues that had the power plant been functional, revenues from surplus power would have offset power generation costs, and that the charges it faces stem from the government's failure to maintain the Dam as required by the 1928 Act. SCIDD cites legislative history, including a letter from John Truesdell, to support its position that Congress was clear about charging costs related to power for the San Carlos Indian Reservation. Moreover, SCIDD claims entitlement to damages for the replacement power it needed to purchase due to the government's inability to operate the Dam, asserting that this scenario was foreseeable at the contract's inception.
In response, the government argues that the costs for operating groundwater pumps, including power, are legitimate O. M. expenses as per the Contract, which allows for a surcharge for maintaining pumps and equipment. The government maintains that it has the authority to charge for pumping power, a practice it had not previously enforced due to adequate revenue from excess power sales. Furthermore, it asserts that the Secretary has discretion over power sales rates and that the Contract does not guarantee that power sales will cover pumping costs. The government also points out that SCIDD had previously acknowledged that some power costs had been covered by the district before the litigation.
SCIDD's interpretation of the statute's language and legislative history lacks persuasiveness. The term "incident" does not indicate congressional intent for the project to be self-sustaining or prevent the government from charging for power as part of ordinary operational maintenance (O.M.) expenses. The sole contemporaneous legislative document, the Truesdell letter, reflects personal conclusions rather than definitive congressional intent, particularly in the absence of explicit language regarding charges for power used in irrigation. SCIDD's references to legislative history from later appropriations hearings do not substantiate its claims of a statutory or contractual obligation for the government to generate sufficient revenue from excess power sales to cover all pumping costs. The discretion granted to the Secretary in pricing power sales suggests no guarantee of revenue sufficient for free pumping power. The government's assertion that the Secretary could effectively give away power is an overstatement of the Contract's terms, which require power to be "sold" and maintain that the Secretary must act reasonably in rate-setting. The Contract obligates the government only to provide power at cost, apply revenues from power sales to reduce pumping costs, and deliver pumps and irrigation systems in exchange for construction cost participation. The government rightly interprets the provision of power for pumps as part of their operation, with no assurance of free power in the Contract or the Act. Additionally, the government contends that, if the Bureau of Indian Affairs is entitled to charge for pumping power at cost, SCIDD cannot dispute the charges. Citing Chevron U.S.A. Inc. v. Natural Resources Defense Council, the government argues for deference to the Interior's methods for determining projected power costs under the contract. The Claims Court's use of the Parker-Davis power rate as a damage measure is disputed by the government, which seeks to charge based on imputed power production costs for specific years and Parker-Davis rates for others.
The government has acknowledged its obligation to provide power at cost under the contract, as established in SCIDD IV, 26 Cl. Ct. at 230. While the government must use advance estimates for future power costs, it cannot adopt an unreasonable methodology for determining the applicable rate, and imputed costs are not considered reasonable in this context. The power plant's non-operational status precludes the government from projecting costs that exceed the cost of available Parker-Davis power. SCIDD's litigation stance on the lower rate between imputed cost and Parker-Davis from 1984 to 1990 remains unclear, but the government is restricted from using a rate higher than Parker-Davis.
SCIDD contends that the Claims Court incorrectly assessed the damages owed due to government overcharges from 1984 to 1994 for two main reasons: (i) the Bureau of Indian Affairs charged SCIDD based on replacement Parker-Davis power costs instead of historical average costs from the damaged Coolidge Dam power plant and diverted profits to a fund in New Mexico, resulting in SCIDD receiving approximately $3.2 million less than warranted; and (ii) the Bureau used advance estimates for pump electrical usage rather than actual usage, leading to an underestimation of damages. SCIDD calculated that its damages should be at least $1,842,536 instead of $770,900, as the charges were based on the Bureau's estimates rather than actual pump usage. SCIDD argues that it effectively faced charges significantly higher than the actual Parker-Davis rate, asserting that the recalculation of actual usage at the proper rate yields the higher damages amount.
The government contends that the imputed cost of the Coolidge Dam was not necessarily lower than the Parker-Davis rate due to several factors: (i) SCIDD's historical cost estimate failed to account for high inflation in the 1970s and 1980s, resulting in an inadequate estimate; (ii) the historical rate did not include deferred maintenance costs that would have been necessary regardless of overflow events; (iii) the fund SCIDD claims was created by overcharges is permissible under 25 U.S.C. § 385c (1994) for major repair reserves, and SCIDD has not demonstrated any misallocation of funds; (iv) SCIDD waived objections to the Parker-Davis rate by preferring it over the imputed historical cost in submissions to the Interior and did not challenge the estimated pump usage; and (v) Parker-Davis was the most cost-effective power source available in 1990 when the Interior made its decision.
The Claims Court correctly applied the Parker-Davis rate throughout the damages period, as any other rate would constitute an abuse of discretion by the Secretary. The central issue was determining the cost of power available after the Coolidge plant became inoperable, where Parker-Davis remained the least expensive option. SCIDD has no contractual right to guaranteed production from the Coolidge plant, meaning its argument for using the imputed cost to avoid damages from the government's breach is based on a misunderstanding. SCIDD's only valid claim is for the lowest price available to the government. Furthermore, SCIDD previously argued that it should only be charged the actual average replacement cost of power, which the Claims Court noted in its order revising damages. The court found that SCIDD was barred by judicial estoppel from relitigating the issue, as it had previously taken a position in court that contradicted its current stance. The doctrine of judicial estoppel prevents a party from adopting a contrary position in subsequent proceedings when their interests have changed.
The resolution of SCIDD's claim regarding charges for estimated power usage is governed by the Contract provisions. The Contract stipulates that the Secretary of the Interior must notify the District of the annual charges in time for the District to conduct necessary tax levies, implying that charges are assessed in advance and based on estimates. The government argues that any excess collections over expenses are retained for future operational costs, indicating that overcharges represent prepayments for irrigation expenses. It asserts that funds have only been transferred from the irrigation division to the power division for actual power used, not for erroneous transfers. The Contract’s advance assessment of charges is deemed reasonable to ensure funds for operating expenses, with the understanding that power is charged only for what is used, maintaining a credit balance for SCIDD.
The remaining issue concerns whether the correct rate was charged when power was purchased, but since SCIDD did not raise any allegations of improper transfer rates in its damages calculations, the court refrains from ruling on that issue. The court affirms that while the government has a duty to maintain the Project, damages can only be awarded based on a contractual expectation interest, which in this case is limited to receiving power at cost. SCIDD's arguments for broader contractual obligations are deemed unsubstantiated by the language of the relevant acts. The revised judgment from the Court of Federal Claims is affirmed, and SCIDD is ordered to bear the costs associated with the case.
