EXHIBIT 5-A

 

Overview of Settlement Agreement as it relates to GWR

 

4. GROUNDWATER REPLENISHMENT PROJECT

 

4.1 Separate Phasing of Groundwater Replenishment Project

 

(a) The Parties agree that the Commission shall decide whether to authorize California American Water to build, as part of the MPWSP, a smaller desalination plant to accommodate the WPA for the product water of the separate GWR Project or, alternatively, build a larger desalination plant without a WPA for the GWR product water (the “GWR Decision”), based on findings related to schedule, cost, benefits, and feasibility. The parties agree that the decision whether these findings are or will be made requires additional information that is currently not available, including more detailed information regarding the schedules and designs of the GWR Project and MPWSP desalination plant, as well as agreements for source and product water for the GWR Project. Accordingly, the parties agree that the GWR Decision should be made in a separate phase of this proceeding after the parties have developed necessary information.

 

(b) The Parties have developed and set forth in this section certain criteria for consideration by the Commission to facilitate its adopting findings necessary to making the GWR Decision after evidentiary hearings in this separate phase.

 

(c) The Parties agree to file and support a Motion for Bifurcation of the GWR Decision into a separate phase. Such motion will:

 

(i) Identify GWR Decision criteria to be addressed in the separate phase as outlined in Section 4.2 below;

 

(ii) Seek such additional amendments in the scope of this proceeding as may be necessary; and

 

(iii) Present an agreed-upon procedural schedule and scope as identified in Section 4.3 below, including the possibility that an advice letter process may be used to demonstrate fulfillment of some criteria after the Commission decision in the bifurcated phase.

 

4.2 Findings for GWR Decision

 

(a) After careful consideration and negotiations, the Parties agree the Commission should make the GWR Decision based upon the findings set forth below and/or information supplied pursuant to the advice letter process in Section 4.3(f). If all of the findings are made or addressed through the advice letter process, then California American Water shall be ordered to enter into a WPA and build the smaller desalination plant. If they are not made or addressed through the advice letter process, then California American Water shall proceed with the larger desalination plant. On that basis, the Parties recommend that the Commission’s primary focus be on the findings set forth below in the separate phase where it makes the GWR Decision. The findings are as follows:

 

(i) MRWPCA has approved the GWR Project pursuant to a certified Final EIR; and no CEQA suit has been filed within 30 days of a Notice of Determination ("NOD"), or if a CEQA suit is filed, no stay of the GWR Project has been granted;

 

(ii) The status of required permits is consistent with the published project schedule, and for any required permits not yet obtained, the weight of the evidence in the record does not show that any of the required permits for the GWR Project are unlikely to be obtained in a timeframe consistent the published project schedule;

 

(iii) There is sufficient legal certainty as to agreements or other determinations in place to secure delivery of source water(s) necessary to produce between 3,000 to 3,500 acre feet per year of GWR product water for the recommended project:[1]

 

(1) The parties acknowledge that MCWRA and MRWPCA are the parties to that certain Agreement Between The Monterey County Water Resources Agency and the Monterey Regional Water Pollution Control Agency For Construction and Operation of a Tertiary Treatment System dated June 16, 1992, as amended by Amendment No. 1 on May 30, 1995, Amendment No. 2 on February 16, 1998, and Amendment No. 3 executed by MRWPCA on May 10, 2002 and MCWRA on May 29, 2002 (all collectively hereinafter referred to as “Tertiary Treatment Agreement”) and that MCWRA and MRWPCA disagree as to the amounts of “tertiary treated water,” as that term is defined in Section 2 of aforementioned Amendment No. 3 to the Tertiary Treatment Agreement, to which each is entitled under the Tertiary Treatment Agreement. With respect to the availability of such tertiary treated water from the Tertiary Treatment Agreement for the GWR Project in an amount that would support a Commission finding of sufficient legal certainty, such availability shall be determined pursuant to the dispute resolution provisions in the Tertiary Treatment Agreement and shall not be determined through action by this Commission. Therefore, the parties agree that with respect to any product water(s) to be conveyed by MRWPCA to implement the GWR Project that are provided pursuant to rights to such tertiary treated water under the Tertiary Treatment Agreement, for the purposes of this Settlement Agreement, no Party shall request either the Commission or the Governance Committee to interpret, rule on, or provide any opinion as to contract rights under the Tertiary Treatment Agreement, and further agree that neither the Commission nor the Governance Committee should so interpret, rule on, or provide any opinion as to any such contract rights;

 

(iv) The weight of the evidence in the record does not show that the California Department of Health or the Regional Water Quality Control Board will decline to accept or approve the GWR extraction or GWR treatment and injection processes, respectively;

 

(v) The GWR Project is on schedule, as verified by a report issued by an engineer licensed in California, to be operable[2] on or before the later of (a) the then-effective date of the Cease and Desist Order of the SWRCB or such other date as the SWRCB states in writing is acceptable, or (b) the date the MPWSP desalination project is scheduled to become operable. The Parties acknowledge that the actual date of operation for the GWR Project and the desalination project could vary from the operation date projected in the schedules, and therefore agree to a range of up to an additional four months from the projected date of operation, before the GWR Project schedule would no longer be considered on an acceptable schedule;

 

(vi) Preliminary design for the GWR Project is at least at the 10% level, represented by a basis of design report (so that an accurate project cost estimate can be generated) or is at a level similar to or more advanced than the level of design for the desalination project portion of the MPWSP;

 

(vii) A GWR Project funding plan, sufficient in detail to be accepted as an application for a State Revolving Fund loan, is in place;

 

(viii) California American Water, MPWMD, and MRWPCA have agreed on a WPA whose terms are just and reasonable; and

 

(ix) The revenue requirement for the combination of the GWR Project and the smaller desalination project, including the projected debt equivalence for the GWR Project, if any, determined pursuant to Section 4.4, is just and reasonable when compared to the revenue requirement for a larger desalination project alone.

 

(b) The parties agree that a revenue requirement premium for the combination of the GWR Project and a smaller MPWSP desalination project may be determined just and reasonable, for some, but not necessarily all of the following reasons, if the combined GWR/smaller desalination project affords significant net benefits in comparison to a larger desalination project alone upon a consideration of all positive and negative externalities associated with the GWR Project. Significant positive benefits that could support the Commission’s approval of such a premium, include, but are not limited to, the following: (i) a material schedule advantage in that the GWR Project is anticipated to be operable sooner than the desalination plant; (ii) water supply resilience and reliability (benefit of the portfolio approach); and (iii) other positive externalities of the GWR Project, including, but not limited to reduced atmospheric carbon emissions, reduced brine discharge, and the implementation and encouragement of State policies regarding water recycling through early adoption of a water reuse project. The Parties anticipate that the evidentiary hearings in the separate phase will support findings by the Commission of an upper range of reasonableness for the price of GWR Project water for inclusion in the WPA based upon consideration of all positive and negative externalities associated with the GWR Project.

 

4.3 Procedural Schedule and Scope

 

(a) The Parties agree to file a Motion to Bifurcate or Otherwise Resolve GWR Decision consistent with this Settlement Agreement promptly after the filing of this Settlement Agreement. The bifurcated schedule is intended to allow determination of the GWR Decision by the Commission prior to the time when California American Water is at the necessary decision point relative to the sizing of the desalination facilities.

 

(b) The Parties agree to request, as part of the aforementioned motion, that the Commission establish the following procedural schedule, designed to achieve a timely determination of the GWR Decision:

 

(i) Testimony of Interested Parties – December 2014

 

(ii) Settlement – commencing in January 2015

 

(iii) Concurrent Rebuttal Testimony – January 2015

 

(iv) Evidentiary Hearings – February 2015

 

(v) Briefing – March 2015

 

(vi) Proposed Decision – June 2015

 

(vii) Final Decision – July 2015

 

(c) The Parties acknowledge that this schedule is intended to provide time for the following:

 

(i) finalization of source water agreements and determinations;

 

(ii) refinement of the design of the GWR and MPWSP desalination

projects to support accurate cost comparisons;

 

(iii) agreement on the form and terms of a WPA, as evidenced by an

executed agreement between the parties to the WPA;

 

(iv) assessment of the benefits of the GWR Project that may reflect a

revenue requirement premium that is just and reasonable;

 

(v) estimation of the revenue requirement adjustment, if any, the

Commission determines necessary for the WPA pursuant to Section 4.4; and

 

(vi) completion of other GWR Project milestones prior to testimony and hearings.

 

(d) The Parties agree that: (i) the Governance Committee, as described in Appendix 1 to this Agreement, is comprised of representatives of local public agencies that are directly accountable to the public that will be served with water from the MPWSP; (ii) that the Governance Committee provides an appropriate means for expression of community preferences concerning the MPWSP; (iii) the GWR Decision will impact the size of the MPWSP desalination plant; and (iv) for this reason, the Governance Committee’s opinion on any one or more of the findings for the GWR Decision set forth above should be provided to the Commission for the Commission’s consideration. Therefore, should the Governance Committee issue a written statement concerning any one or more of the findings set forth above on or before the date set forth above in Paragraph 4.3(b) for submission of testimony or evidentiary hearings, California American Water shall file said written statement with the Commission within ten days of receipt for the Commission’s consideration.

 

(e) The Parties agree that the Commission should be able to adopt findings supporting its GWR Decision at the end of the GWR Decision Phase outlined above, but acknowledge that certain necessary actions may not have occurred by that time. With respect to those actions, the Parties agree that the Commission may direct California American Water to file an advice letter with the Commission demonstrating that the remaining actions have occurred. Issues which may be resolved by advice letter could include, but are not limited to, MRWPCA’s approval of the GWR Project.

 

4.4 Debt Equivalence for the GWR Project

 

(a)                           The Parties acknowledge that a WPA is a contractual obligation of a significant amount of California American Water’s future cash flows. If the obligation must be capitalized by, and is an obligation of, California American Water under Generally Accepted Accounting Principles (GAAP) standards then in effect, it would have a significant impact on the amount of debt and capital assets California American Water records on its financials and could potentially adversely impact California American Water's debt ratios. If it is not required to be capitalized, the rating agencies could nonetheless impute debt for the WPA, which could have a negative impact on the credit rating of California American Water as a stand-alone entity. The Parties therefore agree that the Commission shall determine whether adjustments to the California American Water revenue requirement for the Monterey County District are required to address the debt equivalence impact resulting from the WPA for the GWR Project or for the capitalized obligation of the WPA in a separate phase of this proceeding before the Commission (as described in Section 4.3). California American Water shall consider in good faith any reasonable terms and conditions of a WPA advanced by the public agencies intended to address the debt equivalence issue for the GWR Project.

 

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[1] The Parties recognize that based upon the expected number of trains needed for the desalination plant, the desalination plant could be optimally sized to accommodate certain discrete capacities of 3,000 or 3,500 acre feet per year of GWR product water in order to produce a certain combined capacity from the desalination plant and the GWR Project. California American Water and MRWPCA recognize that cost optimization may not occur at certain discrete capacities for the GWR Project and desalination plant based on the configuration, size and number of the trains. Certain parties have entered into a settlement agreement regarding the sizing of the desalination facilities for purposes of planning and engineering, which provides for the possible combined capacity of the desalination plant and the GWR Project.

 

[2] The operable date of the GWR Project is the date when extractions may first be made by California American

Water from the Seaside Groundwater Basin as the result of the injection and storage of GWR Project recycled water.