ITEM:		DISCUSSION ITEM
21.	DISCUSSION OF PURE WATER MONTEREY PROJECT WATER PURCHASE AGREEMENT RISKS AND PERFORMANCE OBLIGATIONS
Meeting Date:			November 16, 2015	Budgeted:	N/A
From:			David J. Stoldt	Program/
			General Manager	Line Item No.:
Prepared By:			David J. Stoldt	Cost Estimate:
General Counsel Approval: N/A
Committee Recommendation: N/A
CEQA Compliance: N/A

SUMMARY: In the discussion of the previous Agenda Item 20, it was reported that one of the 9 criteria for the acceptance of the Pure Water Monterey groundwater replenishment project (GWR) was :

Criterion 8: California American Water, MPWMD, and MRWPCA have agreed on a WPA [Water Purchase Agreement] whose terms are just and reasonable.

Presently, a substantially complete version has been exchanged between the parties (attached as Exhibit 21-A) and looks like a form of agreement will be agreed to by the end of November, for adoption as to form by MPWMD and MRWPCA at their December meetings in order to satisfy performance under the Memorandum of Understanding on Source Waters and Water Recycling the District has entered into with 4 other public agencies. Final signatures cannot be enacted until approval by the CPUC, which cannot occur until the Phase 2 proceedings are concluded, expected to be June or July 2016. If changes to the WPA are required as a result of the CPUC proceedings, it will be brought back to the District Board.

The proposed WPA was reviewed and discussed by the Water Supply Planning Committee at its November 2^nd meeting and the Committee directed a summary be brought to the Board. The purpose of this report is to update the board on risks and performance obligations to be accepted by the District under the proposed WPA.

RECOMMENDATION: The General Manager recommends the Board receive the update and discuss. The Board is urged to consider the current status report in relation to Action Item 22.

DISCUSSION: The draft WPA can be read in its entirety as Exhibit 21-A. However, this summary will focus on Sections 12, 13, 14, 16, 19, 26, and 27, as well as some remaining areas of disagreement. This summary will also identify certain risks potentially assumed by the District.

Section 12. Water Delivery Guarantee

Under this section, each year the District is to deliver to Cal-Am 3,500 acre-feet (AF) per year, and no less than a minimum amount of 2,800 AF from the plant.

Section 13. Water Availability Guarantee

In each year, the water made available from actual deliveries and from the Operating Reserve or potentially the Drought Reserve must equal 3,500 AF. Hence, under Section 12, above, if the District fails to deliver the full 3,500 but meets the minimum amount of 2,800 AF, the remaining 700 AF would have to come from reserves.

The District has committed to creating two reserves: an Operating Reserve of at least 1,000 AF built up in the first 3-6 months of plant operations in order to provide water during an interruption or shortfall from operations, and a Drought Reserve of at least 1,000 AF built up as 200 AF per year over 5 years which can be assigned to Cal-Am in the event the Monterey County Water Resources Agency requests additional source water for growers in the Castroville Seawater Intrusion Project area due to drought. The District will commit to pay for the costs of treatment and injection of the reserve waters and will not be reimbursed through the WPA until such reserves are designated as delivered to Cal-Am.

Section 14. Water Treatment Guarantee

The District is committing to delivery of water that meets the water quality standards set for in Applicable Law, a broadly defined term that brings in the State Water Board standards and all other public health requirements.

Section 16. Rate of Payment for AWT Water

This section shows that the price of water is based on the recovery of capital investment (Fixed Project Costs) and annual Project Operation and Maintenance Expenses (O&M) for water delivered. These costs could be capped by the CPUC, potentially with an annual escalator for O&M. The actual cost recovery mechanism and water pricing will be a result of the Phase 2 proceedings at the CPUC. The goal is to have a mechanism in place that all future costs are guaranteed for recovery. However, this is not assured as of right now.

Section 19. Breach

There are 7 Events of Default which can result in termination of the Agreement. The District’s goal has been to minimize the likelihood of an Event of Default. However, there are three areas of concern where, although we believe risk is acceptable, there is still risk that merits discussion with the Board at this time: (i) failure to deliver 3,500 AF directly from the plant three years in a row; (ii) failure to deliver 3,500 AF from the plant and reserves, with a minimum of 2,800 AF directly from the plant in two consecutive years, or a minimum of 1,800 directly from the plant in any year; and (iii) failure to deliver 3,500 from all sources in any single year.

The first event could result from a chronic underperformance of the plant to deliver design capacity. The second and third events could be the result of a mechanical failure that takes an extended period to correct, especially if two interruptions occur in succession and the reserves have been depleted.

Section 26. Failure of CPUC Approval

This section is being revised, but will speak to CPUC approval of the Agreement as well as approval of the cost of water, which impacts District and Agency cost recovery. As mentioned earlier, the actual cost recovery mechanism and water pricing will be a result of the Phase 2 proceedings at the CPUC. The goal is to have a mechanism in place that all future costs are guaranteed for recovery. However, this is not assured as of right now.

Section 27. Insurance

The Agency and the District will commit to obtain insurance to ensure their performance obligations. MRWPCA has already tasked a risk consultant to assess insurance availability. The District has already consulted with its insurance provider SRDMA. SRDMA has indicated that the District’s obligations under the WPA are contractual and not tied to facilities or operations under District ownership and are therefore not insurable. Hence, the District would first look to the Agency to compensate for its failure to perform. In cases where neither party’s insurance provides coverage, the obligation would go to the rate payers of each public agency, and a Proposition 218 revenue raising process, as allowable by law. The Agency will likely be constrained from collecting from sewer customers for water supply, so the Prop 218 risk is primarily the District’s.

There is a significant differential between the insurability of the performance of MRWPCA versus the performance of the District. Further, there are significant differences in whose Prop 218 revenue raising capability can be tapped to cover shortfalls and/or damages. For these reasons, among others, the Agency and the District strong oppose Cal-Am’s suggestion that we assume joint and several liability, or that Cal-Am can make a claim directly on the Agency for a District failure to perform and vice versa.

Risk Examples

Construction Risk: Failure to complete the plant on time or construction of a plant that fails to deliver design capacity could trigger events of default. Cal-Am could patiently allow MRWPCA to correct the problem or it could terminate the Agreement. This risk would normally be mitigated by liquidated damages provisions in the construction contract, placing the contractor at risk for payment.

Performance Risk: If the plant develops an inability to perform over time and the warranty period has lapsed or the contractor is no longer in business, any costs of correction may not be approved by the CPUC and would have to be borne by the public agencies. Since it is a water supply project, that means the District’s Prop 218 revenue raising capability would likely be tapped.

Interruption Risk: An interruption of operations due to natural causes or third-party events (e.g. terrorism) will not trigger an event of default. An interruption due to mechanical problems, and accident, operator error, and so forth could trigger events of default. For that reason, we have established an Operating Reserve of at least 1,000 AF to cover deliveries for at least a 3-month period. Working with MRWPCA we may seek to increase the amount available in the Operating Reserve. We are also asking MRWPCA to build up reserves within its enterprise fund for the project to provide a form of self-insurance. Also, as mentioned earlier, we are expecting MRWPCA to obtain insurance for its performance. However, if we are unable to meet the Water Availability guarantee and there are damages, the District will first have to pay and then seek recourse from MRWPCA. Additionally, any cost of repair or replacement not covered by existing funds covered in the purchase price of water will have to be covered by the agencies. Again, since it is a water supply project, that means the District’s Prop 218 revenue raising capability would likely be tapped.

Water Quality Risk: The District expects MRWPCA to insure for this.

O&M Cost Risk: As discussed earlier, a desired result of the Phase 2 proceedings at the CPUC is to have a mechanism in place that ensures all future costs are guaranteed for recovery. However, this is not assured as of right now. If somehow in the future O&M costs (or renwal and replacement costs) have risen faster than that which can be recovered under the initial CPUC approval, we expect Cal-Am to ask the CPUC for recovery in the price of water. However, until recovery is approved, or in the event it is disallowed, the public agencies may have to fund the difference.

Reserve Costs: The District will commit to pay for the costs of treatment and injection of the reserve waters and will not be reimbursed through the WPA until such reserves are designated as delivered to Cal-Am. This will come from the District’s Water Supply Charge or other revenues. 1,000 AF could cost on the order of $2 million. Hence the District needs to begin to reserve for this expense.

Cal-Am Performance Risk: If Cal-Am failed to make timely payments for water delivered, for whatever reason, the District Board at its April 2015 meeting approved the District’s use of its own credit and Prop 218 revenue raising ability to ensure fixed debt payments are covered. The District would then seek recourse from Cal-Am, its successor, or its receiver.

EXHIBIT

21-A Draft Proposed Water Purchase Agreement

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