September 10, 2006

Monterey Peninsula Water Management District

5 Harris Court, Building G

Monterey, CA 93942

Attn: Mr. David Berger, General Manager

Dear Mr. Berger:

In response to questions raised by your committee requesting clarifications regarding the formation of our new consulting firm, Pueblo Water Resources, Inc. (PWR), we are pleased to offer the following background information.

• Although PWR officially opened its doors for business on August 14, 2006, the concept of ‘splitting off’ from Padre was actually introduced in a meeting held with Padre Associate’s owners in February 2006.
• With respect to the timing of our departure from Padre Associates, the schedule of actions was determined primarily by the implementation of business formation (i.e. securing office space, insurance, equipment, etc).
• The formation of PWR has been welcomed by both new and former Padre Associate’s clients. Our existing contractual backlog of work is approximately $1 million, not including any current or pending work from MPWMD. Our clients include Camp, Dresser & McKee, ASR Systems LLC, City of Santa Barbara, El Capitan Mutual Water Company, Exxon/Mobil Corporation, and others; as well as our former employers, Padre Associates Inc.

With respect to our summary of estimated fees and corporate overhead, Pueblo’s policies are as follows:

• Overhead, which is built into our hourly rates for professional services, include ordinary costs that are common to all clients we serve. These costs include the following:

1. Office rental
2. Office supplies (computers, photocopying, telephone, fax)
3. Professional, general, and auto liability insurance

• Those significant costs that are incurred for a specific project are billed to the project as Other Direct Costs (ODC’s), and include items such as:

1. Analytic instrument rental
2. Field work consumables (test reagents, parts, etc.)
3. Out-of-town travel & lodging (i.e. per diem)
4. Vehicle rental

By separating out ODC costs, our overhead is kept low, which benefits all of our clients. All ODC costs are billed only as incurred, and are obtained at the most competitive rates available at the time. Our budgetary estimates developed in the proposal phase of the work are our best, conservative, opinion of what the project needs will be; we only bill for those services actually used for the project, and will not exceed our proposal estimate without prior, written authorization from the District.

The Santa Margarita Test Well Project is very important to Pueblo Water Resources because it represents the completion of a program that we have individually championed since 1997; we still firmly believe that the Districts forward looking implementation of ASR on the Monterey Peninsula is the ultimate solution to rectify environmental damage to the Carmel River while providing a safe and reliable water supply for the community. We look forward to continuing our work with MPWMD on this important project under our new company.

If you have any further questions or require additional information, please call us.

Sincerely,

Pueblo Water Resources, Inc.

Stephen P. Tanner, P.E.
President

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