ITEM: ACTION ITEMS

17. DISCUSSION OF CURRENT WATER SUPPLY ISSUES, INCLUDING WATER CREDIT TRANSFERS AND STATUS OF JURISDICTION ALLOCATIONS

Meeting Date: January 29, 2004 Budgeted: N/A

Program/Line Item No.: N/A

Staff Contact: Henrietta Stern Cost Estimate: N/A

Stephanie Pintar

General Counsel Approval: Staff note provided for review

Committee Recommendation: PAC/TAC reviewed on January 28, 2004

CEQA Compliance: Needed for new program(s)

SUMMARY: The history and current status are provided for the following:

Ø MPWMD Water Allocation Program,

Ø MPWMD Water Credit Transfer Program,

Ø State Water Resources Control Board (SWRCB) Order WR 95-10 and compliance,

Ø Seaside Groundwater Basin water production and current management efforts, and

Ø California-American Water Company (Cal-Am) water supply system.

This information serves to set the stage for the discussion in Item 18, which addresses options and procedures required to provide limited water to the community until a long-term water supply project fully complies with Order 95-10. A long-term project focusing on desalination at Moss Landing and/or Sand City is not expected to be operational for at least another 5-7 years.

RECOMMENDATION: The Board should review the information provided, hear a brief oral presentation by staff, pose questions as needed, and receive public comment.

BACKGROUND AND DISCUSSION: The following text provides a detailed overview of the five topics noted above.

MPWMD WATER ALLOCATION PROGRAM:

Put simply, the MPWMD Water Allocation Program sets the maximum Cal-Am annual production limit (size of the “water pie”). From 1980 to early 1993, the program set jurisdiction water allocations from the Cal-Am total (“slices of the pie” shared by member jurisdictions). Since 1993, specific allocations are issued to each jurisdiction when a new source of supply is developed. Approval of new construction and remodels by jurisdictions entails approval of an associated MPWMD water connection permit that estimates potential future water use. The estimated water use is deducted from the jurisdiction’s water allocation by MPWMD, similar to a bank checking account. Water connection permits are issued until there is no water left in the account. A connection fee based on the projected water use is assessed; the majority of the fee goes to development of water supply projects to ensure a reliable supply as the community grows. Once a permit is issued, there is usually no monitoring of actual use for individual properties. However, the District works with Cal-Am to track residential, commercial and other water uses by jurisdiction or by area; in some cases, the District tracks individual water use.

The Water Allocation Program is focused on the Cal-Am water system that derives its supply from the Carmel River and Seaside Basin Coastal Subareas (known as the Monterey Peninsula Water Resources System or MPWRS). Jurisdictions within the MPWRS include the cities of Carmel-by-the-Sea, Del Rey Oaks, Monterey, Pacific Grove, Sand City, Seaside; Monterey Peninsula Airport District; and portions of unincorporated Monterey County within the District, primarily Pebble Beach, Carmel Highlands, Carmel Valley and portions of the Highway 68 corridor.

Water Allocation Program History

MPWMD Ordinance No. 1 was adopted in September 1980 to establish interim municipal water allocations based on existing water use by the jurisdictions. Resolution 81-7 was adopted in April 1981 to modify the interim allocations and incorporate projected water demands through the year 2000. Under the 1981 allocation, Cal-Am’s annual production limit was set at 20,000 acre-feet (AF), based on average hydrologic conditions; no evaluation under the California Environmental Quality Act (CEQA) was performed at that time.

In 1987, the city of Carmel-by-the-Sea sued the District over the Water Allocation Program. A court-ordered settlement required preparation of an Environmental Impact Report (EIR) on the program. On November 5, 1990, the MPWMD Board certified the Water Allocation Program Final EIR, adopted CEQA Findings, and passed a resolution that set Option V as the new water allocation limit. Option V resulted in an annual Cal-Am production limit of 16,744 AF, based on dry-year conditions. The Water Allocation Program EIR determined that, even though Option V is the least damaging alternative of the five options analyzed, production at this level may result in significant, adverse, environmental impacts that must be mitigated. Thus, the Board adopted a "Five-Year Mitigation Program for Option V" and several general mitigation measures. The Five-Year Mitigation Program formally began in July 1991 with the new fiscal year. To date, as part of the annual budget approval process, the District Board has voted to continue the program because of continued pumping impacts to the environment.

Ordinance No. 52 was adopted in December 1990 to implement the District’s Water Allocation Program, modify the resource system supply limit, and to temporarily limit new uses of water until a new water supply source was developed. The ordinance stemmed directly from the certification of the EIR the previous month. As a result of Ordinance No. 52, a moratorium on the issuance of most water connection permits within the District was established for a 28-month period. Adoption of Ordinance No. 52 formally reduced Cal-Am’s annual production limit to 16,744 AF.

Ordinance No. 70 was adopted in June 1993 to modify the resource system supply limit, establish a water allocation for each of the jurisdictions within the District, and end the moratorium on the issuance of water connection permits. Adoption of Ordinance No. 70 was based primarily on development of the Paralta well in the Seaside Groundwater Basin and increased Cal-Am’s annual production limit to 17,619 AF. More specifically, Ordinance No. 70 allocated 308 AF metered sales of water to the jurisdictions and 50 AF to a District Reserve for regional non-profit projects with public benefit. Paralta well production capacity of 385 AF was set aside as a community drought reserve in addition to 230 AF to address the deficit that was calculated at that time. (The deficit referred to the 230 AFA needed to serve the connections that were permitted in the 1987-1990 period while the Allocation Program EIR was being prepared.) A significant ramification of Ordinance No. 70 was that tracking of water use within a jurisdiction focused solely on the jurisdiction’s share of the 308 AF from the Paralta well rather than the jurisdiction’s original total water allocation amount.

Ordinance No. 73 was adopted in February 1995 to eliminate the District Reserve and allocate the remaining water equally among the eight jurisdictions. Of the original 50 AF that was allocated to the District Reserve, 34.72 AF remained and were distributed equally (4.34 AF each) among the jurisdictions.

Ordinance No. 74 was adopted in March 1995 to allow the reinvestment of toilet retrofit water savings on single-family residential properties. The reinvested retrofit credits must be repaid by the jurisdiction from the next available water allocation and were limited to a maximum of 10 AF. This ordinance sunset in July 1998, but was immediately reinstated via Ordinance No. 90 (see below). The following jurisdictions borrowed 12.43 AF through this program:

Jurisdiction AF Used

Monterey 0.622 AF

Pacific Grove 3.587 AF

Seaside 0.091 AF

County of Monterey 8.130 AF

Ordinance No. 75 was adopted in March 1995 to allow the reinvestment of water saved through toilet retrofits and other permanent water savings methods at publicly owned and operated facilities. Fifteen percent of the savings were set aside to meet the District’s long-term water conservation goal and the remainder of the savings were credited to the jurisdictions allocation. This ordinance sunset in July 1998, but was immediately reinstated via Ordinance No. 91 (see below).

Ordinance No. 83 was adopted in April 1996 and conditionally set Cal-Am’s annual production limit at 17,621 AF and the non-Cal-Am annual production limit at 3,046 AF. The modification to the production limit was made based on an agreement by a non-Cal-Am water user to permanently reduce annual water production from the Carmel Valley Alluvial Aquifer in exchange for water service from Cal-Am. As part of the agreement, 15% of the historical non-Cal-Am production was set aside to meet the District’s long-term water conservation goal.

Ordinance No. 87 was adopted in February 1997 as an urgency ordinance establishing a community benefit allocation for the planned expansion of the Community Hospital of the Monterey Peninsula (CHOMP). Specifically, a special reserve allocation of 19.60 AF production was created exclusively for the benefit of CHOMP. With this new allocation, Cal-Am’s annual production limit was increased to 17,641 AF and the non-Cal-Am annual production limit remained at 3,046 AF.

Ordinance No. 90 was adopted in June 1998 to continue the program allowing the reinvestment of toilet retrofit water savings on single-family residential properties for 90 days following the expiration of Ordinance No. 74. This ordinance sunset in September 1998.

Ordinance No. 91 was adopted in June 1998 to continue the program allowing the reinvestment of water saved through toilet retrofits and other permanent water savings methods at publicly owned and operated facilities.

Ordinances No. 90 and No. 91 were challenged for non-compliance with CEQA and nullified by the Monterey County Superior Court in December 1998.

As explained below, it is notable that limits on Carmel River diversions imposed by SWRCB Order WR 95-10 in 1995 and Seaside Basin production targets identified by MPWMD have limited actual allowable Cal-Am annual production to 15,285 AF. This quantity effectively supercedes all allocation amounts described above.

Current Water Allocation Status

Each month, the MPWMD Board packet contains an information report of the amount of water available to member jurisdictions and other specific recipients. The most recent report through December 31, 2003 (Exhibit 17-A) indicates that there are over 156 AF available to jurisdictions. The “Paralta Allocation” refers to Ordinance No. 70 described above. The “Pre-Paralta” figures refer to water permits that were cancelled after Ordinance No. 70 was adopted in 1993. In addition, there are quantities earmarked for specific projects or areas, based on previous contracts, ordinances or litigation. The largest involves water associated with the Carmel Area Wastewater District/Pebble Beach Community Services District Wastewater Reclamation Project, which is commonly referred to as the “Pebble Beach Reclamation Project” (see below).

It is notable that many jurisdictions have determined they have no water to allocate, while District records indicate an available supply. The difference is due to different stages within the planning process at which the jurisdiction and the District debit the jurisdiction’s allocation “account” for a specific project. A jurisdiction may also choose to hold water aside for specific projects, such as a major redevelopment project. The jurisdiction debits its water account early in the planning process, when an application is received. The District debits water from a jurisdiction’s account when a water connection permit is issued, which is one of the last approvals before a building permit is issued. Many months (or years) can pass for a project to move through the planning process. Using a banking analogy, the jurisdiction writes a “check” for a project based on its in-house allocation balance, and the District (serving as the “bank”) debits the jurisdiction account only when the “check is cashed.” Each jurisdiction manages its water allocation, and therefore the jurisdiction may be “out of water” while the District’s information shows that water is still available.

A total of 380 AF metered sales is guaranteed under contract for designated properties within Del Monte Forest due to the Pebble Beach Reclamation Project. This water is referred to as “water entitlements” and is recognized as a special class of supply by the SWRCB. To date, about 20 AF have been used, leaving about 360 AF. Additional information about potential supply from reclaimed water is provided in Item 18.

WATER CREDIT TRANSFER PROGRAM:

Put simply, the intent of the Water Credit Transfer Program (WCTP) was to facilitate economic normalcy in a constrained water supply setting while also supporting the District’s conservation and environmental goals. A key assumption is that transfers will result in net reduced water use.

The WCTP presently allows transfers of commercial Water Use Credits from an existing commercial use to either an expanding commercial use in the same jurisdiction, or to a jurisdiction’s water allocation. Once a Water Use Credit is transferred into a jurisdiction’s allocation, the water is available for use at the jurisdiction’s discretion and can be used for residential and non-residential uses, new connections and remodels. All transfers require the authorization of the jurisdiction and the District. The property owner must agree to transfer the credit and agree to a deed restriction on the property. Deed restrictions are recorded to ensure that water credits removed from a site could not be reused at that site in the future.

Water Use Credits are presently calculated according to District Rule 25.5, which allows a documented Water Use Credit for permanent and quantifiable reductions in water use. The District retains 15 percent of the estimated water savings associated with Water Use Credits documented under this Rule. Examples include permanent changes in use from one type of commercial use to another less intensive water use (e.g., restaurant to office), and various retrofits (e.g., replacing water-cooled refrigeration systems with air cooled systems).

Water Credit Transfer Program History:

Despite extensive successful conservation efforts, water supply for new construction and remodeling projects on the Monterey Peninsula is extremely limited for a variety of environmental, regulatory and technical reasons. The WCTP began in 1993 as a means to facilitate commercial expansion within the community in light of the multi-year drought, 28-month moratorium and need for continued conservation. Environmental review on the WCTP ordinance was not carried out at that time. As described below, a series of MPWMD ordinances refined the program to its current state as described in MPWMD Rule 28-B (Exhibit 17-B).

In December 1993, the Board adopted Ordinance No. 71 to allow transfers of commercial water credits from an existing commercial use to an expanding commercial use in the same jurisdiction. In September 1995, the Board approved Ordinance No. 79, which modified the transfer rule to allow commercial credits to transfer into a jurisdiction’s allocation for use at the jurisdiction’s discretion.

In January 2000, the MPWMD Board considered modifying the water credit transfer program to include residential uses. At the time, the key issue was whether current District rules, which allowed the transfer of commercial water credits to a commercial site, but prohibited the transfer of residential water credits to another residential site, should be amended. No action was taken.

At the February 2000 meeting, the Board directed staff to prepare a report on whether or not water demand has been reduced as a result of the existing water credit programs. The preliminary report was presented on March 20, 2000, and indicated that the anticipated water savings from the program were not occurring. The Board directed staff to continue its research and report back in 90 days.

District staff began an extensive data collection process in March 2000. The 90-day goal was immediately thwarted because the needed Cal-Am customer data were not available. Cal-Am agreed to release the data to MPWMD for limited purposes once a non-disclosure agreement was signed on June 7, 2000. Given the complex nature and extended time frame to complete the water savings report, a series of actions were taken as described in the following paragraphs.

District Ordinance No. 95 was adopted on June 19, 2000 to allow only commercial-to-commercial water credit transfers of “like kind” to occur during a 90-day moratorium on water credit transfers. During the 90-day period, the effectiveness of the water credit program was to be reviewed. The proposed ordinance was effective for 90 days and was extended for a second 90-day period on September 18, 2000 to give staff time to have a third party review the findings from its water credit analysis. The ordinance expired on December 18, 2000, after consideration of a third extension of the ordinance was continued by lack of a quorum at the December 11, 2000 meeting.

Ordinance No. 100, a 90-day ordinance suspending the authority of the Water Management District to receive any water credit transfer applications under District Rule 28-B that are not for “like-to-like” (identical) commercial-to-commercial or industrial-to-industrial expansions of an existing use, was adopted on March 19, 2001 (and expired on June 18, 2001). Also in March 2001, the MPWMD Board addressed concerns about financial abuses of the WCTP by passing Ordinance No. 97, which restricts the amount of money or other consideration that can be given in exchange for a water credit transfer.

The third party analysis of the water savings on commercial sites and sites receiving water from credit transfers was completed on June 1, 2001 and provided to the Board. The report was inconclusive as to whether the program was achieving its goals. On June 18, 2001, the District Board suspended receipt of water credit transfer applications for 60 days (August 17, 2001). District staff was directed to consider modifications to the water credit transfer process that would incorporate additional safeguards to prevent an increase of water use at the receiving site beyond the original transfer amount, and safeguards that would ensure that accurate estimates of historical water use at the donor site are developed.

At the August 20, 2001 meeting, District staff presented a number of policy questions to the Board with the intent to craft a new Ordinance No. 101 based on the consensus of the Board feedback. The District’s Technical Advisory Committee and Policy Advisory Committee reviewed the conceptual Ordinance No. 101 in July and August 2001. The Board adopted the second reading of Ordinance No. 101 (Exhibit 17-C) in November 2001. The ordinance allowed reuse of 50% of the water saved; the jurisdiction received 15% of the savings and the MPWMD received 35% of the savings. The ordinance was brought back for reconsideration in December 2001. It was not approved at that time, and is currently not in effect.

MPWMD Ordinance No. 102, adopted in February 2002, rescinded Rule 28-B and the WCTP as a whole after determining that the program had not resulted in anticipated water savings that originally motivated the program. Six cities filed suit against the District in May 2002 challenging the rescission of the program on CEQA grounds.

On March 17, 2003, the MPWMD Board approved the first reading of Ordinance No. 107, which rescinds Ordinance No. 102, thereby restoring the WCTP as defined in Rule 28-B prior to Ordinance No. 101. On April 2, 2003, the Board approved the first reading of Ordinance No. 108, which clarifies that approval of a water credit transfer application is a discretionary act by the Board, and such action requires CEQA review. On May 19, 2003, the MPWMD Board adopted on second reading both Ordinances No. 107 and 108; both became effective on June 18, 2003. Finding No. 5 of Ordinance No. 107 states that it is the Board’s intention to prepare an EIR to address concerns that have been raised about the program. The Board expressed concern about the efficacy of the current WCTP, and questioned whether WCTP water savings goals have been accomplished, thereby exacerbating current environmental damage to local water resources. The Board had earlier directed at its February 27, 2003 meeting that applications for water credit transfer approval shall not be considered by the Board until after the EIR is certified.

Two sets of Requests for Proposal (RFP), most recently in July 2003, were transmitted to consulting firms to prepare an EIR on the termination of the WCTP. Two alternatives included reinstating the existing water credit transfer program (No Project alternative) and re-enacting Ordinance No. 101. Only one firm responded to the RFP. At its August 28, 2003 meeting, the Board determined that it would not proceed with the EIR.

On December 18, 2003, the Superior Court determined that the cities were the prevailing party in their lawsuit against the District, and ordered the District to pay 50% of the cities’ attorney fees and costs.

Status of Water Credit Transfer Program

To date, a total of 26 applications have been approved representing 60.843 AF of water transferred. No current applications are under consideration.

It is staff’s understanding that the current Board leadership wishes to move forward immediately on an EIR on a water credit transfer program as defined by Ordinance No. 101. Policy direction by the full Board on water credit transfer issues requires guidance to: (1) define proposed project and alternatives, and (2) determine means to select consultant (sole-source or new RFP). Based on consultant feedback in August 2003, a rough time estimate is 9-12 months for a Final EIR at a cost of up to $250,000.

SWRCB ORDER WR 95-10:

Order 95-10, issued in July 1995, is the controlling factor in water supply planning, resource management, and water allocation on the Monterey Peninsula. In essence, it supercedes all previous allocation-related action and Cal-Am production limits. The Order addressed formal complaints lodged in 1987 against Cal-Am by several agencies and environmental groups, alleging unlawful diversion of water from the Carmel River as well as environmental damage to sensitive resources, notably steelhead. It is the result of two major hearings in 1992 and 1994, and entails an extensive administrative record. A pertinent excerpt is attached as Exhibit 17-D. Though Order 95-10 has been modified by subsequent orders, the essential components (stated below in non-legal language) remain the same:

Ø Groundwater in the Carmel River alluvial aquifer is treated legally the same as surface water in this situation.

Ø The SWRCB has jurisdiction over the Carmel River and the groundwater in the alluvial aquifer, and Cal-Am needs an SWRCB permit to divert water from the river and aquifer to serve the community.

Ø The river is fully appropriated (used up) from May 1 through December 31, and the SWRCB has not issued any permit to Cal-Am for year-round use since 1995. (Note: the fully appropriated determination is found in SWRCB Decision 1632.)

Ø Cal-Am has recognized rights to only 3,376 AF annually from the Carmel River Basin.

Ø Any quantity over the 3,376 AFA is being unlawfully diverted. Order 95-10 estimated that the annual unlawful Cal-Am diversion amount was 10,730 AF, based on a historical average of 14,106 AFA in the 1980s.

Ø Cal-Am shall immediately cease and desist unlawful Carmel River diversions, resulting in a loss of about 70% of the water supply for the Monterey Peninsula (as of 1995).

Ø Recognizing the economic and health impacts of such a loss, Cal-Am will be allowed to divert a total of 11,285 AF/year from the Carmel River Basin (a 20% reduction from the historical average of 14,106 AF) until a replacement supply for the unlawful diversions is developed (new dam, desalination plant, etc).

Ø Substantial fines shall be imposed on Cal-Am (which could potentially be passed onto the community) whenever Cal-Am Carmel River diversions exceed 11,285 AFA during this interim period.

Ø Cal-Am should maximize water production in the Seaside Basin and minimize Carmel River diversions in the low-flow season to the degree feasible.

Ø Any new water supply component shall first be used to offset all of the unlawful pumping from the Carmel River (estimated at 10,730 AFA) on a one-for-one basis before any water may be made available for new construction and remodels. For example, if a 3,000 AFA desalination plant were constructed, no water could go to new construction or remodels; instead, Cal-Am must reduce its unlawful Carmel River pumping by 3,000 AFA.

History of SWRCB Action

The history of SWRCB action in relation to Order 95-10 and other water rights decisions affecting the Monterey Peninsula is extensive and complex, and is not reviewed in detail here. Briefly, once Order 95-10 was finalized in July 1995, the District and other parties appealed to no avail. Lawsuits were filed by the District and other parties in late 1995; many concerns were settled via SWRCB Order 98-04 issued in 1998. Notably, in June 1998, the SWRCB denied a formal request by MPWMD to adjust the 11,285 AFA diversion limit because the limit interfered with previous MPWMD allocation commitments. In July 1998, MPWMD filed a lawsuit challenging the legality of the SWRCB denial. This lawsuit failed; the Court upheld and confirmed SWRCB authority to interpret and implement the Order.

The SWRCB executive staff has formally responded to letters from MPWMD asking that certain aspects of the Order be clarified. Two are notable. First, a March 27, 1998 SWRCB letter recognizes entitlement water from the Pebble Beach Reclamation Project. The 11,285 AF interim diversion limit may be increased by up to 380 AF to accommodate new construction facilitated by the reclamation project. However, this letter also makes it clear that Order 95-10 does not allow the diversion limit to be increased to accommodate any use of MPWMD’s 420 AF share of the anticipated savings from operation of the reclamation project (see Item 18 for additional discussion). Second, November 26, 1997 and December 3, 1999 letters assert that water credit transfers may violate Conditions 2 and 3 of Order 95-10 and violate the spirit of Order 95-10. The SWRCB staff indicated it would recommend action to reduce the 11,285 AF Cal-Am diversion limit to correspond with future water allocations associated with water credit transfers. The SWRCB position has not changed to date.

Status of Compliance with SWRCB Order 95-10

Exhibit 17-E is a chart that shows how well the community has stayed below the 11,285 AFA Cal-Am diversion limit from the Carmel River. In 1997, the first year of the limit, the community exceeded the limit by 1,562 AF (13.8% over), and was fined roughly $168,000 by the SWRCB. Since then, the community has remained 106 to 1,131 AF (0.9% to 10%) below the limit. The average production for years 1997-2002 was 260 AFA below the limit. If 1997 is excluded as an anomaly, the average 1998-2002 production was 564 AF (5.0%) below the limit. The District’s Expanded Water Conservation Program and Standby Rationing Plan (Ordinance No. 92), outreach by Cal-Am, greater environmental awareness by the public, and a series of normal and above-normal rainfall years have contributed to this performance.

SEASIDE BASIN:

Exhibits 17-F and 17-G provide figures of the 24-square-mile Seaside Groundwater Basin, which is divided into several subbasins and subareas. For this report, the primary area of interest is the Coastal Subareas, where all the major Cal-Am and other significant water wells serving the community are located. The Seaside Basin is more complex than the Carmel River Basin, and is comprised of several aquifer “layers”, including ancient sand dunes near the surface (Aromas Formation), a less permeable intermediate layer (Paso Robles Formation) and the deeper, more productive layer known as the Santa Margarita Sandstone. Roughly 25% of the Cal-Am municipal supply currently is extracted from the Basin. Extensive information associated with previous public workshops on the Basin is on file at the District office.

History of Seaside Basin Management

The MPWMD is mandated to provide integrated management of surface and groundwater resources, including those of the Seaside Basin, most of which occurs within District boundaries. A 1993 agreement with the Monterey County Water Resources Agency acknowledges the District’s exclusive authority to manage the water resources of the Basin. The history of management in the Seaside Basin is very briefly summarized here. The MPWMD conducted a series of hydrogeologic investigations over the past two decades to characterize the Basin, with emphasis on two Coastal Subareas and the Laguna Seca Subarea (Highway 68 area). These studies have enabled MPWMD to estimate the reliable long-term yield of the Basin, and set production targets to protect the basin from overpumping and/or seawater intrusion, which has plagued nearby communities dependent on the Salinas and Pajaro Basins. At one time, the estimated reliable yield for the Coastal Subareas was 4,500 AFA; the current reliable yield estimate is 4,375 AFA based on updated hydrogeologic investigations that more accurately estimated yield based on the practical rate of withdrawal. The MPWMD maintains a series of monitor wells that are regularly tracked for water levels and water quality.

Since 2000, the District has worked with interested stakeholders to develop a Seaside Basin Groundwater Management Plan; this effort is ongoing. A recommended major work effort associated with the Management Plan is developing reliable yield estimates for specific aquifers within the Basin (e.g., Paso Robles and Santa Margarita) rather than lumping them together. This effort will foster recommendations on how best to locate and operate wells to maximize efficient use of the basin while protecting its hydrologic integrity.

Current Status

Ground water levels in the coastal portion of the Seaside Basin have not been stable in recent years, in particular with respect to the deeper Santa Margarita aquifer, from which over 80 percent of the Cal-Am production in the Seaside Basin is derived. Ground water levels from several dedicated District monitor wells in the Coastal Subareas show a downward trend, even in wet years. This reflects the changed production operations in the Seaside Basin stemming from SWRCB Order 95-10. As noted above, the 1995 Order limited Cal-Am diversion from the Carmel River Basin, and required Cal-Am to maximize its production from the Seaside Basin within the long-term yield of the basin to meet community needs. The Order has resulted in much higher Cal-Am withdrawals after the Order as compared to before the Order. The Seaside Basin has not been allowed to recharge (“rest”) in wet years as was done in the past. The increased reliance on production from Cal-Am’s major production wells in Seaside has contributed to lowered water levels in the Santa Margarita aquifer, and to a lesser extent in the overlying Paso Robles aquifer. Seasonal recoveries associated with short-term reduced production in winter have not been sufficient to reverse this trend. Another factor is new and expanded use of non-Cal-Am wells in the Basin due to change in ownership and control of properties on the former Fort Ord.

For many years, 4,000 AFA was used as a maximum Cal-Am production target in the Seaside Basin Coastal Subareas. This value is included in the “Regulatory Water Production Targets” as part of the MPWMD Expanded Water Conservation Program (Rules 161 and 162). SWRCB Order 98-04, issued in 1998, has also affected Cal-Am production in the Seaside Basin. This order requires Cal-Am to minimize production in Seaside whenever Carmel River flow is greater than 40 cubic feet per second during the November through April period. Thus, in many years, Cal-Am production may be closer to 3,500 AFA. Cal-Am and District staffs meet quarterly to develop a 3-month water supply strategy. In recent years, Cal-Am and the District have aimed for a 3,500 AF annual production goal in Seaside rather than 4,000 AFA, to help reduce impacts and stay within the 4,375 AFA reliable yield estimate of the Coastal Subareas. For water supply planning purposes, such as for the MPWMD water project (desalination) EIR, a maximum annual Cal-Am production target of 3,500 AF is used rather than 4,000 AFA. It is noted that production of 4,000 AF may be needed in certain water years, but prudent planning indicates that 3,500 AFA is a more appropriate target value, consistent with overall management objectives.

Exhibit 17-H is a chart showing water production in the Seaside Basin Coastal Subareas for the 1993-2002 period; data for water year 2003 are not yet available. In 1993-1995, Cal-Am annual production was in the 1,800-2,800 AF range. Reflecting Order 95-10, production in 1996 and 1997 was in the 4,400-4,600 AF range. Reflecting Order 98-04, production in 1998-2002 was in the 3,300-4,000 AF range, and averaged nearly 3,600 AFA. The average is raised by one year (2000) with production of 4,013 AF; all other years since 1998 were 3,578 AF or lower.

Non-Cal-Am users (Bayonet/Blackhorse golf courses and Seaside Municipal Water Company) also draw from the Coastal Subareas. Since new management took over the golf courses in the late 1990s, there has been nearly doubled water use, on the order of roughly 200-300 AF more production as compared to use prior to year 2000. While Cal-Am use has been declining, the increased non-Cal-Am use has contributed to total production that is near or over the estimated safe yield of 4,375 AF in the Coastal Subareas.

In addition, the Phase III Hydrogeologic Update of the Laguna Seca Subarea prepared for MPWMD in November 2002 determined that current water production (1,008 AF) is almost double that predicted in the 1988 Phase II study. This quantity is more than double the estimated safe yield of the Subarea under current operating conditions (400 AF). Though the reliable yield could potentially be increased by a series of operational changes, it still would be lower than current demand. The report concluded that the Laguna Seca Subarea is in overdraft.

Since 1996, the District has been testing the feasibility of aquifer storage and recovery (ASR), and has injected nearly 950 AF of water to date. Please refer to Item 18 for a more information.

In August 2003, Cal-Am filed a lawsuit against all other water users in the Seaside Basin. Cal-Am seeks to protect its pumping rights by requesting a Court adjudication (determination of how much each user may pump) of the Basin. In November 2003, the District successfully filed as an intervener to the lawsuit, and is now recognized by the Court as a participating party in the litigation. In January 2004, the City of Seaside filed a legal complaint that asks the Court to limit the District’s regulatory authority over use of water in the Basin. The results of the litigation and adjudication proceedings are uncertain and cannot be predicted.

CAL-AM WATER SUPPLY SYSTEM:

Cal-Am’s “Monterey District” main supply system serves approximately 95% of the water users in the District and provides approximately 80% of the water consumed within the District. The main system derives its supply from three sources: (1) the Carmel River via surface diversion at San Clemente Reservoir, (2) 17 wells drawing ground water from the Carmel Valley alluvial aquifer, and (3) eight wells drawing ground water from the coastal subareas of the Seaside Basin.

When the Water Allocation Program EIR was certified in 1990, the nominal capacity of Cal-Am’s supply sources, calculated in acre-feet per day (AFD) exceeded that of today. This comparison is shown below:

Cal-Am Supply Source 1990 Capacity (AFD) 2003 Capacity (AFD)

San Clemente Reservoir Diversion 32 0

Carmel Valley Wells (with Water West wells) 84.43 61.31

Seaside Coastal Wells (with Paralta well) 20.77 19.33

GRAND TOTAL 137.20 80.64

SOURCE: Well capacity data from Cal-Am (3/90, 8/03); “new” Paralta assumed at 1,700 gpm.

This overall loss of supply capacity is due to a number of factors, including:

Ø Recent order from the California Division of Safety of Dams that requires San Clemente Dam to be drawdown year-round, essentially eliminating the diversion to Cal-Am’s Carmel Valley Filter Plant from the reservoir,

Ø Loss of capacity from individual wells as these wells and appurtenant facilities age,

Ø Loss of well sources in Carmel Valley due to increased requirements to meet the Surface Water Treatment Rule administered by the California Department of Health Services.

In addition, physical constraints (e.g., raw water pipeline capacity to the Begonia Iron Removal Plant in Carmel Valley; treated water pipeline capacity from the Seaside Ozone Treatment Plant) and regulatory constraints (e.g., SWRCB Order to produce Carmel Valley ground water in downstream to upstream sequence; Conservation Agreement with NOAA Fisheries regulating Carmel Valley well pumping during low flow periods) have further restricted Cal-Am’s ability to produce water for the Monterey Peninsula community. From the completion of San Clemente Dam in the early 1920s and for the next 70 years, the main supply system operated as a “top-down” gravity-driven system. However, within the last 10 years or so, the system has slowly been re-engineered to operate from the “bottom-up,” primarily to address environmental impacts from the former water supply practices upon the Carmel River and its habitat. This had led to further inefficiencies from a system operations standpoint.

Presently, the Cal-Am supply system would need major funding to restore capacity and efficiency. Decisions regarding certain system improvements (e.g., a new well and treatment facility in the lower Carmel Valley) have been deferred due to uncertainties regarding the eventual make-up of the water supply system, should a major new water supply project such as a desalination plant be approved and constructed. It should be noted that funds and improvements would be required to expand the capacity of the Seaside Basin ASR project over the level currently available to support the District’s ASR testing program.

EXHIBITS:

17-A: November 30, 2003 Allocation Summary

17-B: MPWMD Rule 28-B

17-C: MPWMD Ordinance No. 101 (rescinded)

17-D: Excerpt from SWRCB Order 95-10

17-E: Cal-Am production as compared to Carmel River diversion limit

17-F: Figure of Seaside Basin (plan view)

17-G: Figure of Seaside Basin (cross section)

17-H: Cal-Am and non-Cal-Am production in the Seaside Basin Coastal Subareas

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HS 1/22/04