REVISED as of 9/13/2012

ITEM:

ACTION ITEM

 

15.

DISCUSS AND RECOMMEND DISTRICT POSITION ON CAL-AM APPLICATION RE: GOVERNANCE, OWNERSHIP, AND FINANCE

 

Click here to view original staff report as of 9/12/2012

 

Click here to view addendum staff report as of 9/17/2012

 

Meeting Date:
September 17, 2012

Budgeted: 

 N/A

 

From:

David J. Stoldt,

Program/

N/A

 

General Manager

Line Item No.:

 

Prepared By:

David J. Stoldt

Cost Estimate:

N/A

 

General Counsel Review:  N/A

Committee Recommendation: N/A

CEQA Compliance:  N/A

 

SUMMARY:  Intervenor testimony for Cal-Am Application 12-04-019 is due in February, however what are called “Public Agency Participation Proposals” are due October 1st.  The CPUC describes these proposals in the following:

 

“While the Application contemplates some complementary public agency projects (groundwater replenishment and aquifer storage and recovery), there may be opportunities for one or more public agencies to have a direct role in the Monterey Peninsula Water Supply Project itself. The idea of a private-public partnership in the area of financing was floated in the Workshop, for example. Other areas of possible collaboration may exist, and it is reasonable to consider those to the extent that they are feasible and sufficiently developed to allow implementation in a timely manner. While Cal-Am may believe that the window for altering the project to include public agency participation has closed, Cal-Am should be open to and seriously consider in good faith any public agency proposal for direct participation in the MPWSP made to it no later than October 1, 2012. Any such proposals must be adequately detailed to show that they are technically, legally and economically feasible. Cal-Am shall file a progress compliance report by October 26, 2012 on any public agency participation proposals.”

 

The District must formulate its principle arguments, especially as they relate to governance, ownership, and finance.

 

RECOMMENDATION:  The Board should discuss and recommend its position to staff for inclusion in submittals to Cal-Am and the CPUC.  The Water Supply Planning Committee has developed recommendations that include the following:

 

GOVERNANCE

 

The District has been working jointly with the Monterey Peninsula Regional Water Authority (MPRWA or Mayors’ JPA) and with Cal-Am to develop a potential framework of governance that might not only provide greater public oversight than would be afforded public entities in other regulated utility settings nationwide, but would also provide meaningful local Peninsula participation in four key areas of District concern: (i) transparent reporting of activities to the public; (ii) decision-making authority over certain selected key issues; (iii) commitments to work jointly on several important topics; and (iv) assurances that the CPUC recognize the need for coordinated operations.

 

To this end, the Water Supply Planning Committee recommends the formation of a “Governance Committee,” or alternatively a “Project Partnership Committee” that is comprised of three public entities, (i) MPWMD, (ii) MPRWA, and (iii) the County and its Water Resources Agency, and is comprised of one elected member from each public partner, as well as one designated staff member from each public partner.  Each of the members and Cal-Am, except in the situations identified below, will have an equal weight in decision-making. 

 

The function of the Governance Committee shall be to: (i) in consultation with and assistance from Cal-Am and the design-build firm, provide a means to coordinate the design, permitting, construction, operations, maintenance, repairs, and replacements of the components of the Project; (ii) serve as the entity which Cal-Am regularly updates; and (iii) consult with and provide advice to Cal-Am in connection with the Project.  The members of the Governance Committee shall diligently consider all matters and cause the Governance Committee to timely and promptly make its final recommendations.

 

Three categories of issues/decisions/topics have been identified that may be addressed by the Governance Committee in the following manner:

 

Category A:  The Governance Committee makes the decision after receiving advice from Cal-Am.

 

Category B:  The Governance Committee shares the decision-making role with Cal-Am (equal votes of each of the three public entities and Cal-Am,) however Cal-Am may exercise a veto right and override.

 

Category C:  Cal-Am makes the decision after receiving advice from the Governance Committee.  In this case, from the public agency perspective, if Cal-Am does not follow the advice of the Governance Committee, then it may need to answer to the PUC at the next rate case.

 

In addition, the Governance Committee should be given a specified timeframe in which to make any decisions or provide any advice, otherwise Cal-Am should be enabled to act.  This is to avoid undue delay to the implementation of the project.

 

Hence, the Water Supply Planning Committee recommends the following with respect to governance:

 

Category A:  Governance Committee Makes the Decision w/ Advice from Cal-Am

 

1)      Right to determine the “Go/No Go” decision with respect to the Groundwater Replenishment project, in conjunction with MRWPCA;

 

2)      Selection of the Certified Value Engineer (to perform value engineering on project);

 

3)      Right to request inspection of facilities and right to receive quarterly reporting from CPUC related to expenditures and CPUC audit rights;

 

4)      Determine project aesthetics consistent with community values, if within the CPUC approved budget; and

 

5)      Provide leadership and coordination with respect to procurement of alternative (non-PG&E) energy supplies for the project, including waste-to-energy.

 

Category B:  Governance Committee Shares Decision-Making with Cal-Am Equally in Most Cases, However Cal-Am May Exercise a Veto Right and Override

 

1)      The actual performance and adoption of value engineering recommendations;

 

2)      Establishment of qualifications and selection criteria for design and engineering contractors;

 

3)      Review and evaluation of proposals from qualified contractors;

 

4)      Participation in the selection of the design and engineering professionals, especially with respect to the award of the design-build contract;

 

5)      Review and concurrence of material changes at key stages of the design process, including:

 

·         Basis of Design

·         30% Design

·         60% Design

·         Value Engineering

·          90% Design, and

·          Final Design

 

6)      Approval of major change order over $1 million;

 

7)      Community outreach – (a) establishing and recommending a plan and budget before issuance of the CPCN, and (b) create and implement community outreach programs in coordination with Cal-Am;

 

8)      Determine project aesthetics consistent with community values, if not within the CPUC approved budget;

 

9)      Coordinate on the disposition of the Outfall Agreement with MRWPCA;

 

10)    Coordinate with respect to the award of pipeline contracts in each jurisdiction.

 

Category C:  Cal-Am Makes Decision After Advice from the Governance Committee

 

1)      Monitor the design, engineering, and permitting of all elements of the project, quarterly;

 

2)      Review contract terms, including financial, to be required in all major contracts, both construction and service, if any, for the Project;

 

3)      Prepare and quarterly update an overall construction budget for the project;

 

4)      Review and accept a detailed plan for acceptance testing, including follow-up reporting;

 

5)      Annually review the Project O&M budget and rate impacts; and

 

6)      Provide a coordinated role with respect to local and regional permit requirements.

 

The District also believes a separate “Operations Committee” comprised of Cal-Am, the District, MRWPCA, and the Watermaster should be created to coordinate planning and operation of the various water supply projects, especially as they relate to the use of the Seaside Groundwater Basin for storage and recovery of water.

 

FINANCING

 

The District will offer to be the Public “Partner” for financial issues.  This means that the District will make the following commitments and request that the CPUC final order direct Cal-Am to consider these financing alternatives before Cal-Am seeks to return to “business as usual.”

 

This includes six basic requests:

 

1)      If available, State Revolving Fund (SRF) loans should be maximized and considered for up to 100% of the project funding to reduce costs to Peninsula ratepayers;

 

2)      If SRF loans are not available for the entire project, then require Cal-Am to examine tax-exempt “private activity” debt as a funding source for both the debt component, but preferably additionally in lieu of equity.

 

3)      Consider a public agency (i.e. MPWMD) contribution in lieu of Cal-Am debt or equity to reduce costs to Peninsula ratepayers.  The contribution would be made via public debt and the source of repayment either a surcharge on the Cal-Am bill or direct fees and charges to property owners in the District established with a Proposition 218 process;

 

4)      Even in the event of a Cal-Am borrowing, the District should offer and the CPUC should accept the District’s potential public credit “backstop” to enhance the Cal-Am borrowing credit rating and reduce costs to Peninsula ratepayers.  The District offers to substitute its public credit as a backstop to Cal-AM’s creditworthiness in order to reduce the cost of Cal-Am’s debt.  It is anticipated that Cal-Am’s parent obligation carries a credit rating of Baa2, but the District could raise that to perhaps A1.  This might require the use of a “stand-by water purchase agreement,” a “rate covenant,” and other standing commitments;

 

5)      In all cases, the CPUC should require – at that point in the future when permanent financing is considered – that the then-current market conditions be considered and, if warranted, the public participation in financing as outlined above be required.

 

6)      If it turns out that State Revolving Funds require a public partner, as it normally would in most cases, the District offers to serve in that role;

 

OWNERSHIP

 

Should a public owner become necessary or desirable, the District stands ready, able, and willing to serve in that role and provide the leadership to procure, build, and operate a facility and sell water to Cal-Am through a wholesale water purchase agreement.  The District would use the water purchase agreement, bolstered by a backstop of its municipal credit, to secure public financing for such a project.

 

PAY-AS-YOU-GO FUNDING

 

Surcharge 2 has been developed by Cal-Am to provide $99 million of “pay-as-you-go” funding to the project.  It means that current residents will pay up to almost half of the overall project cost during the next 4 years.  While it is a sensible method to reduce the overall costs to ratepayers, it does however increase the funding requirements on current ratepayers – i.e. those who live here now and will pay for the next 4 years.  The Board should consider whether this burden is acceptable to the community or whether such “pay-as-you-go” funding should represent public investment in the project that should be recognized with an ownership interest.

 

OTHER FINANCIAL

 

The stranded costs of the Regional Desalination Project and potential future costs of slant well replacement should be included in the analysis such that the “true cost” of desalination is reflected, especially as it relates to a cost comparison with Groundwater Replenishment.

 

OTHER ISSUES

 

The Committee also discussed sizing of the project, additional conservation programs, and grey water and cisterns.  These topics will be addressed in future testimony scheduled for February.

 

EXHIBIT

15-A    Evaluation of Financing Alternatives - DRAFT

 

 

 

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