SPECIAL MEETING/BOARD WORKSHOP
5.	DISCUSS Proposed Agreement with California American Water Regarding Management and Operation of SEASIDE BASIN Aquifer Storage and Recovery Facilities
Meeting Date:		May 3, 2005	Budgeted:	N/A
From:		David A. Berger,	Program/	N/A
		General Manager	Line Item No.:
Prepared By:		Joe Oliver	Cost Estimate:	N/A
General Counsel Approval: Yes
Committee Recommendation: Pending
CEQA Compliance: N/A

SUMMARY: The Board will discuss the proposed Agreement between the Monterey Peninsula Water Management District (MPWMD or District) and California American Water (Cal-Am) regarding Management and Operation of the Seaside Basin Aquifer Storage and Recovery (ASR) facilities. The purpose of the ASR project is to benefit water supply and environmental conditions in the Carmel River and Seaside Groundwater Basins. The proposed Agreement (Exhibit 5-A) is the product of a negotiation between respective management staff and legal counsel of the District and Cal-Am. This negotiation was prompted by California Department of Health Services (CDHS) interim approval of the District’s ASR test injection well (Exhibit 5-B). In order for the test injection well to be used during the 2005-06 water year, CDHS requires that informal arrangements over the past several years for the well’s operation and maintenance be converted to a long-term written agreement between the District and Cal-Am. Accordingly, the Agreement, as drafted, contemplates that the District would issue a 20-year license to Cal-Am for operation and maintenance of the ASR facilities. In addition to clarifying joint efforts, needed cooperation and respective ownership rights, of and between MPWMD and Cal-Am on the present ASR facilities, the proposed Agreement will serve to facilitate plans being undertaken by both entities to expand and make permanent--on an accelerated basis, ASR project facilities and their operations.

The Administrative Committee held a special meeting at 4:30 p.m. on April 18 to review this proposed Agreement. Committee members raised several questions and expressed concerns about the proposed agreement, some of which staff and legal counsel addressed in the meeting. In part because other questions and issues required further information and review, the Committee concluded that the proposed Agreement should not be considered by the Board in the form attached to this agenda report, and the item should be scheduled for a Board workshop. During the April 18 Board meeting Acting Chairperson Markey announced that the proposed Agreement would not be considered that evening. The matter was dropped from the agenda as there were no objections from other Board members.

The purpose of this workshop item is for Directors to discuss the proposed ASR Agreement, concerns and questions that Administrative Committee members and others have expressed about it, and for the Board to give staff direction on the Agreement. Staff and legal counsel initial responses to concerns and questions raised in the April 18 Administrative Committee meeting are contained in this report.

RECOMMENDATION: Staff recommends that the Board review the proposed ASR Agreement (Exhibit 5-A), discuss issues that have been raised, and provide direction.

BACKGROUND: Since initiating an ASR pilot program in the Seaside Basin in 1996, the District has been cooperating with Cal-Am on installation and operation of ASR test facilities, based on a mutual desire to develop further knowledge and planning of this important water resource project. This cooperative effort, while successful, has been undertaken without a formal written agreement between the parties regarding ASR operations. In July 2004, during the permitting process with the CDHS to allow water from the District’s test injection well, the Santa Margarita Test Injection Well (SMTIW), to be delivered to Cal-Am customers via the Cal-Am distribution system, the CDHS reiterated their request that an agreement between the two parties be provided. An agreement was requested by CDHS to show that Cal-Am was authorized by the District to pump water from the SMTIW on a long-term basis. At this same time, one of Cal-Am’s main Seaside production wells, the Paralta well, suffered an equipment failure, necessitating use of the SMTIW on an emergency basis as a back-up supply for the Cal-Am system. The cost and other impacts of this unexpected occurrence on SMTIW operations and maintenance, coupled with District and Cal-Am management recognition that a framework was needed for joint cooperation on future ASR planning, also served as a catalyst for negotiating this proposed Agreement.

The draft Agreement contains specific descriptions of ASR-related facilities owned by the respective parties, clarifies each entity’s role in ASR operations, as well as costs associated with the existing and future planned ASR program. The following is a summary of its key provisions:

1. Definitions are included of ASR Facilities owned by the District, and Associated ASR Facilities owned by Cal-Am, including respective rights to permits, planning and construction each party holds to their respectively owned facilities.

2. Cal-Am’s obligation to operate the ASR Facilities and Associated ASR Facilities, and the District’s functional responsibilities and authority with respect to the SMTIW, are set out in a detailed Operations and Maintenance Manual that the District staff has reviewed and which is part of the proposed Agreement.

3. Cal-Am’s operation and use of the SMTIW will conform to the District’s quarterly water supply budget strategy for most effective management of the Seaside groundwater resources.

4. Cal-Am and the District jointly agree to cooperate in securing permits and approvals needed for current and future ASR facilities and their operation.

5. Cal-Am will not charge the District for water injected into the ASR Facilities, and the District will not charge Cal-Am for water recovered from its ASR Facilities.

6. Cal-Am will pay for all costs to operate, maintain, repair and replace the District-owned ASR Facilities, including our actual and necessary ASR-related costs; and the District would separately license the operation of its ASR Facilities to Cal-Am initially for a 20-year period, conditioned on Cal-Am’s compliance with District-approved quarterly annual water supply budgets.

Administrative Committee members raised several questions and concerns at their April 18 special meeting regarding the draft Agreement, as shown below. Two letters taking issue with the draft Agreement were received (Exhibits 5-C and 5-D). District staff’s and legal counsel’s responses to these issues are summarized below, along with the status of follow-up on any questions not addressed at the April 18 meeting.

1. Would the Agreement or License give Cal-Am the ability to earn a profit on ASR Facilities? General Counsel Laredo advised that California Public Utilities Commission (CPUC) regulations allow Cal-Am to earn a specific percent on its investment in the water production/distribution system, which is called a Return on Equity, based on the value of facilities in which they have made an investment, to the extent the CPUC has authorized the investment. Since the District would continue to own its ASR Facilities, as defined in the Agreement, and under the ownership model contained in the draft Agreement, Mr. Laredo expressed the opinion that Cal-Am would not earn its ROE on the ASR Facilities.

2. Why should the District enter into an Agreement and 20-Year License with Cal-Am to operate the District’s ASR Facilities? The CA Department of Health Services (CDHS) requires the District-owned SMTIW and other ASR facilities be added to Cal-Am’s CDHS water system permit. This is required because excess Carmel River water is diverted to, and recovered from, the District-owned ASR test injection well through the Cal-Am potable water system that CDHS regulates to protect public health and safety. Before it will process that permit amendment, CDHS interim approval in 2003 (reiterated in its 2004 interim approval) requires Cal-Am to submit “a copy of an agreement between Cal-Am and MPWMD giving Cal-Am the long-term right to pump water from the Santa Margarita Well into Cal-Am’s distribution system.”

3. How does CDHS define a “long-term right” cited in its letter, and would they accept year-to-year or some shorter term? On April 21 District staff met with CDHS officials Betsy Lichti and Jan Sweigert who are responsible for Cal-Am Coastal Division system regulation, to discuss this question. These officials advised that the length of an ASR agreement CDHS would deem acceptable relates directly to their concern about the long-term reliability of Cal-Am’s currently available water supply; and they stated that a year-to-year term would not be acceptable. They were unable to provide the minimum agreement length that CDHS would find acceptable without further internal review, but committed to providing a letter responding to this question within approximately 10 days.

4. Because the Agreement states that the 20-Year License would be “irrevocable during its term” wouldn’t the District have to buy-out the License if Cal-Am were to be publicly acquired? General Manager Berger and General Counsel Laredo advised that the District and Cal-Am negotiators intent is that the proposed Agreement and License terminate if either party ceased to exist, and that such limiting language will be set forth in the License. Mr. Laredo stated language could be added to the Agreement that the License would not be assignable, and would revert to the District without creating any financial obligation on the District, if the Cal-Am system were to be acquired by the District or any other public or private entity.

5. Why shouldn’t the District charge Cal-Am for the License? Berger and Laredo advised that the CPUC would most likely allow Cal-Am to pass this cost through to the ratepayers, which didn’t seem to be in the District’s interest. On this same basis, the proposed Agreement provides that Cal-Am would not charge the District for water diverted from the Carmel River into the ASR Facilities, nor would the District charge Cal-Am for ASR-injected water recovered into the Cal-Am system. This avoids Cal-Am ratepayers (most of whom also are District residents and property owners) having to pay twice for the cost of water already produced. The proposed Agreement requires Cal-Am to pay all ASR-related expenses, and to reimburse the District for all “actual and necessary costs it may incur related to the ASR Facilities or the Associated ASR Facilities.”

6. The fifth “Whereas” and Paragraphs 9-12 of the draft Agreement appear to commit the District to supporting Cal-Am’s Coastal Water Project, and all permits related thereto (see Exhibits 5-C and 5-D). Berger advised that the opposite meaning was intended in the fifth Whereas, i.e. Cal-Am has an interest in accelerating ASR by detaching from the Coastal Water Project ASR Phase 1 through the District’s EIR now underway, and the proposed Agreement provides a policy and legal foundation to accomplish that objective and further ASR phased expansion. Laredo advised that the proposed Agreement language could be amended to clarify that the District commits to support Future ASR projects jointly undertaken with Cal-Am (see paragraph 8), and not permits and other actions required for the Coastal Water Project.

7. Paragraph 21(Arbitration) should be deleted. Mr. Stamp states his concern by letter on April 18, 2005, that the draft Agreement uses binding arbitration as the model to resolve any irreconcilable dispute between Cal-Am and the District. Arbitration is a common model to resolve disputes in commercial ventures, especially where the parties share a common goal and the need for continued cooperation will extend beyond any temporary dispute. Arbitration is both a lawful and common tool for many public activities, including labor and facilities agreements.

8. CEQA applies to adoption of the draft Agreement. Unquestionably the underlying ASR facility and its operation constitute a project under CEQA, and decisions relating to that project must be made in accord with the CEQA process. The project requiring analysis is the whole of the action – that is – the ASR facility itself, and not each discrete aspect in the preliminary planning of the facility and its operations. Decisions as to which entity will hold primary responsibility to own or operate each discrete portion of a project does not constitute a separate project. These decisions, of themselves, cannot have an effect upon the environment. While the draft Agreement facilitates planning of the ASR effort, it will not, by itself, cause or commit the ASR project to proceed.

IMPACT TO RESOURCES: Approval of the proposed Agreement will reduce District expenditures, in that energy and other expenses we now absorb for operation, maintenance and repair of the ASR test injection well will be shifted to Cal-Am. This cost is budgeted at $65,000 in fiscal 2004-05. If this MOA is approved, the cost savings will become part of eliminating the District’s operating deficit in the fiscal 2005-06 proposed budget. Of course, there would not be savings to most District residents and businesses, as they would ultimately pay these ASR costs through Cal-Am customer service rates.

EXHIBITS

5-A Proposed Agreement Titled: Aquifer Storage And Recovery (ASR) Management and Operations Agreement Between California American Water And Monterey Peninsula Water Management District

5-B August 15, 2003 Letter from Betsy Lichti, CDHS to Steve Leonard, Cal-Am

5-C April 18, 2005 Letter from Michael Stamp to District Board

5-D April 18, 2005 Letter from Marc Del Piero to District Board

U:\staff\word\boardpacket\2005\2005boardpackets\20050503\05\item5.doc