SPECIAL JOINT MEETING
DISCUSSION ITEM
2.	LONG-TERM WATER SUPPLY FOR THE PENINSULA – WHERE DO WE STAND AND WHERE ARE WE GOING?
Meeting Date:		October 17, 2017	Budgeted:	N/A
From:		David J. Stoldt	Program/
		General Manager	Line Item No.:	N/A
Prepared By:		David J. Stoldt	Cost Estimate:	N/A
General Counsel Approval: N/A
Committee Recommendation: N/A
CEQA Compliance: Not a project as defined by the California Environmental Quality Act Guidelines Section 15378.

SUMMARY:  The application to the California Public Utilities Commission (CPUC) for the Monterey Peninsula Water Supply Project (MPWSP) was filed by California American Water (Cal-Am) in April 2012. During that extended time period through today, several events have occurred: (i) The environmental impact report for the MPWSP was delayed several times and is now expected in March 2018; (ii) The Cease and Desist Order (CDO) issued by the State Water Resources Control Board (SWRCB) was extended to December 31, 2021 with the implementation of new annual milestones and penalties; (iii) The Pure Water Monterey project and Monterey Pipeline were approved by the CPUC; (iv) Consumer demand for water use has trended downward, and the CPUC has asked for additional testimony on demand levels and the supplies required to meet them; among other things. As a result, the Authority and the District should engage discussion on the following:

a) Summary of recent MPWSP testimony at the CPUC (Demands, supply need, interim supplies; Where do future general plan needs come in?)

b) CPUC Schedule and SWRCB milestones/penalties under the CDO; How will it really work?

c) Water allocation process going forward – History, method, timing

d) How can our agencies best support each other in advancing our missions, and meeting the needs of our community? (Includes review of mission statements of each agency)

Each of these is addressed below.

a) Summary of Recent CPUC Testimony

DEMAND AND SUPPLY: In an August 28, 2017 ruling titled “Assigned Commissioner and Administrative Law Judge’s Ruling Setting Issues and Schedule for Further Evidentiary Hearings and Requiring Submission of Supporting Documents” the CPUC requested additional testimony on 9 areas. Primary among the topics, was sizing the water supply project – the first two issues:

1. Demand: updated estimates and analysis of demand including but not limited to:

a. use by existing customers

b. status with respect to legal lots of record

c. status with respect to Pebble Beach

d. status with respect to economic recovery of hospitality industry

2. Supply: updated estimates and analysis of supply including but not limited to:

a. Plans for expansion of the Pure Water Monterey (PWM) project, if any

b. Can expansion of the PWM project provide water to applicant in excess of 3,500 acre-feet per year, in what amounts, and at what cost

c. Is water available for purchase by applicant from Marina Coast Water District, in what amounts, and at what cost

The other issues upon which the CPUC requested input are:

3. Updated cost estimates for the MPWSP.

4. Updated information on project financing

5. Feasibility and costs of MPWSP being downsized or construction in modular increments

6. Role of solar and renewables.

7. Access to land at the CEMEX site if CEMEX ends operation

8. Are modifications needed, if any, to any pending Settlement Agreement?

9. In determining whether or not to grant the CPCN, what consideration should the Commission give to community values, recreational and park areas, and historical and aesthetic values

Testimony of the parties is summarized in Exhibit 2-A attached hereto. Since the 2012 application was filed, the overall water supply needs of the Peninsula, and required supply, have been sized as follows:

Demand	Supply
13,290 AF average customer demand 500 AF for economic recovery 325 AF for Pebble Beach buildout 1,181 AF for legal lots of record ------------- 15,296 AF total demand	3,376 AF legally from Carmel River (2017) 1,474 AF legally from Seaside Basin (2021) (700) AF Cal-Am intends to leave in the Seaside Basin for recharge for 25 years 94 AF available from Sand City long term 1,300 AF assumed available from ASR 3,500 AF from Pure Water Monterey 6,252 AF from Desalination Plant ------------ 15,296 AF total supply

The testimony reflects differing views on the applicability of the 4 components of demand, and therefore, the needed supply project to serve replacement water.

DEMAND FOR GENERAL PLAN BUILD-OUT: None of the demand projections in the testimony include water for build-out of the 6 cities, unincorporated county, or airport general plans, with the exception of the testimony of the Coalition of Peninsula Businesses, which supports a 9.6 MGD desalination facility, despite already existing approval and construction of Pure Water Monterey. By design, the proposed MPWSP is only supposed to replace the unlawful diversions and meet already approved, legally required uses of water, not general plan growth. Hence, the issue of when to plan for additional water is worthy of discussion.

In 2006, the District prepared an estimate of future water needs based on information obtained from the service area jurisdictions. Each jurisdiction provided estimates of the number of residential units and nonresidential square footage that would be developed under buildout of the currently adopted general plan, as well as anticipated residential remodels. The MPWMD estimated that 4,545 AFY would be needed to meet future water demands.

Since the 2006 estimate was prepared, the future water needs of four jurisdictions have been revised, reducing the total:

· Monterey County adopted a new general plan in 2010 that revised their water demand estimates;

· The City of Pacific Grove testified on the MPWSP in 2013, revising its estimate of water needed to accommodate general plan buildout;

· The City of Seaside commented on the April 2015 MPWSP Draft EIR, updating its future water needs, and noting that full buildout of the West Broadway Urban Village Specific Plan would require a net increase of 80 afy of water.

· Sand City built the 300-afy Sand City Coastal Desalination Plant. In consideration for the delivery of 300 afy of potable water from this plant to the CalAm system, MPWMD Ordinance 132 establishes a water entitlement of 206 afy from the CalAm system for Sand City, separate from the city’s current water allocation, and indicates that the remaining 94 afy will be permanently added to CalAm’s system. The estimated future demand for Sand City is therefore revised to reflect that 206 afy of the city’s future demand will be offset by supply from the city’s desalination plant, which is why it is not included in the supplies assumed for the MPWSP in most demand analyses, even though most of it is likely to remain available to Cal-Am for the next 10 to 15 years.

With these revisions, future demand would total 3,526 afy. The table on the next page shows the District’s 2006 future demand estimates, with and without the four revisions. In addition, Pacific Grove may reduce its future demand estimate by 66 afy because of the Pacific Grove Local Water Project. However, the city has not submitted a formal revision to its demand numbers since the 2013 revision noted above.

FUTURE WATER DEMAND - SERVICE AREA JURISDICTIONS

(acre-feet per year)

Jurisdiction	Future Supply Needs (2006 Estimate)a	Future Supply Needs (Revised Estimate)
City of Carmel	288	288b
City of Del Rey Oaks	48	48
City of Monterey	705	705
City of Pacific Grove	1,264	500c,d
City of Sand City	386	180e
City of Seaside	582	662f
Monterey County (Unincorporated)	1,135	1,005
Monterey Peninsula Airport District	138	138
Total	4,545	3,526

Note: All footnotes have been deleted for this staff note; Interested parties should contact the General Manager for additional information if desired.

At some point, the jurisdictions and the District should coordinate an update of future water needs related to general plans, as well as better understand the interaction of future needs with legal lots of record and Pebble Beach entitlement. How and when to update future general plan buildout might be a topic subject to discussion at the Special Joint Meeting.

SUPPLY – EXPANSION OF PURE WATER MONTEREY: With respect to the issue of Pure Water Monterey expansion, in its testimony Monterey One Water developed 3 scenarios of plant expansion that are deemed possible. They are summarized in the table below:

Summary of PWM Project Expansion Scenarios

	Scenario A	Scenario B	Scenario C
AWPF rated capacity (approved PWM Project = 4 mgd)	5 mgd	6.5 mgd	10 mgd
Approved PWM project yield to CalAm	3,500 AFY	3,500 AFY	3,500 AFY
Incremental yield above approved PWM Project for CalAm	650 AFY	2,250 AFY	3,570 AFY
Estimated total yield for CalAm	4,150 AFY	5,750 AFY	7,070 AFY
Incremental capital cost above the approved PWM Project	$6.9 million	$51.6 million	$132.9 million
Annual operations and maintenance costs (Approved plus Expansion Scenario)	$5.0 million	$6.2 million	$8.4 million
Cost of water ($/AF) (1)	$1,897	$1,858	$2,335
Estimated construction completion date (see Note 2)	4th Quarter of 2019	4th Quarter of 2020	4th Quarter of 2022
Note 1: Loan term of 10 years for Scenario A; and a 40 year term for Scenarios B and C. Assumes a 3% interest rate on revenue bonds, interest only internal loan to support the debt reserve requirement for the State Revolving Fund Loan, and supplemented replacement and renewal costs. Note 2. The completion dates are based on concept-level critical path analysis that are affected by timing of MRWPCA receiving funding, financing, local partner agency

b) CPUC Schedule and SWRCB milestones

The current CPUC schedule for the proceeding is attached as Exhibit 2-C and the SWRCB milestones for performance under the CDO are included as Exhibit 2-D.

Key questions related to schedule include the following:

· What is the CPUC’s schedule for approval?

· Will approval happen soon enough to meet the next CDO milestone?

· What if there is a CEQA lawsuit over the Final Environmental Impact Report (FEIR), will CPUC approval be delayed? Will we miss a milestone?

· If there is a CEQA lawsuit, do we have a contingent back-up plan?

· If we miss a milestone, what happens?

· Doesn’t Pure Water Monterey help us against a missed milestone?

Each of these are addressed below:

WHAT IS THE CPUC’S SCHEDULE FOR APPROVAL? Exhibit 2-C shows the CPUC schedule. The FEIR is scheduled to be released March 16, 2018. There are 10 days to then file opening briefs on the FEIR, followed by 7 days to file closing briefs, or April 2^nd. On such a schedule, the best that could occur is a proposed decision from the CPUC in mid- to late-April. To allow 30-day public review, that means the certification of the FEIR would not likely occur until the second business meeting of the CPUC, late May. As discussed below, it is likely that the Certificate of Public Convenience and Necessity (CPCN) or project approval would be issued by the CPUC at the same time.

WILL APPROVAL HAPPEN SOON ENOUGH TO MEET THE NEXT CDO MILESTONE? Yes, likely. As shown in Exhibit 2-D, the next CDO milestone is the issuance of the CPCN on or before September 30, 2018. If the CPCN is issued at the CPUC’s second May business meeting, this milestone is met. It also means there are 4 months available for delays at the CPUC. However, any delay at this point must be met with reaction from the Parties and entreaties to the SWRCB to weigh in with the CPUC.

WHAT IF THERE IS A CEQA LAWSUIT OVER THE FINAL ENVIRONMENTAL IMPACT REPORT (FEIR), WILL CPUC APPROVAL BE DELAYED? It is unlikely that a CEQA lawsuit can be filed before CPUC approval and the issuance of a CPCN. There are 3 actions the CPUC must take before a party can file a CEQA lawsuit: (i) a Notice of Determination (NOD) is filed upon project approval, which triggers a 30-day period for legal challenges; (ii) the project approval in the CPUC’s case is done through the issuance of the CPCN; and (iii) the CPCN can only be issued upon certification of the FEIR. Hence, it is likely that the CPUC will both certify the FEIR and issue the CPCN at the same business meeting, although they could separate the two. The NOD is usually filed by staff a few days after the project approval step. Hence, it appears that the CPCN would not be delayed beyond the CDO milestone due to a CEQA lawsuit. (Note: some agencies have issued an NOD upon certification of an FEIR, however the body of law shows that that project approval is required.)

WHAT IF THERE IS A CEQA LAWSUIT OVER THE FINAL ENVIRONMENTAL IMPACT REPORT (FEIR), WILL WE MISS A MILESTONE? As shown above, it is unlikely to miss the CDO’s September 30, 2018 milestone due to a CEQA lawsuit. However, the subsequent 2019 CDO milestone would be at risk. The 2019 milestone is start of construction of the desalination plant, excavation of brine and backwash storage basins, and 25% completion of the transmission pipeline. Any litigant would first attempt to get the court to issue an injunction against proceeding with the project. An injunction would require showing irreparable harm and a set of facts that could be construed as the basis for potentially prevailing in court. An injunction would halt the project.

Even without an injunction, if the case is allowed to proceed, then there is always the specter that a plaintiff might prevail. Thus, it becomes a Cal-Am corporate decision whether to proceed with the project in the face of litigation.

One nuance here is the venue – the California Supreme Court. The Supreme Court could send it down to a lower court or hear the case itself. It is unknown at this time path would be taken. Either way, landing in the courts will likely require 2 years or more to resolve.

IF THERE IS A CEQA LAWSUIT, DO WE HAVE A CONTINGENT BACK-UP PLAN? This is part of the reason for the CPUC request for information about expansion of Pure Water Monterey. In its testimony, the Planning and Conservation League has suggested that the CPUC consider a contingent CPCN for Pure Water Monterey expansion. The concept would be: If the desal plant becomes uncertain, delayed, or deferred, then expansion of Pure Water Monterey would be allowed to proceed. (Note: Other intervenors in the CPUC proceeding have suggested an expansion of Pure Water Monterey should be done in lieu of the desalination facility.) There has also been the offer by Marina Coast Water District of interim water supplies for a 6- to 10-year period. Then, once lawsuits clear, a down-sized desalination facility would be permitted to proceed.

Relative to the CDO risks: Carmel River pumping the past three years of record (2014-16) averaged 7,209 AF. Pure Water Monterey can replace 3,500 AF and Cal-Am has a legal right to 3,376 AF – leaving 340 AF of unmet need. The expansion and interim water can more than offset that amount. Hence, even if the desalination plant gets tied up in court, there is a path to satisfying the CDO milestones. However, in this case, the SWRCB would need to invoke footnote 17 of the CDO: “If at any point prior to completion of the facilities listed in these Milestones the CPUC authorizes Cal-Am to acquire more than 1,000 afa of water from an alternative source, then the following shall occur. Cal-Am shall submit to the Executive Director within 60 days a revised set of milestones taking this water supply source into account. If the proponents of the alternative project are unable to reach concurrence with Cal-Am on revised milestones to propose, the proponents may also submit revised milestones within that time period. The Executive Director shall determine whether to bring forward a recommendation to the State Water Board regarding amendment of the milestones.”

IF WE MISS A MILESTONE, WHAT HAPPENS? The first effort will be, months in advance of the milestone, to report to the SWRCB indicating that a milestone is likely to be missed for reasons beyond Applicants’ control (“Applicant” includes Cal-Am, the Authority, and the District), and request the State Water Board to make a determination during its regular meeting that the cause for delay is beyond Applicants’ control. If the State Water Board determines that the cause is beyond Applicants' control, it may suspend any corresponding reductions under the CDO until such time as the Applicants can reasonably control progress towards the milestone. The report must be submitted at least 120 days prior to the milestone and a hearing at a regular board meeting may be scheduled with the State Board no sooner than 60 days after submission of the report

If such relief of the milestone is not granted by the SWRCB, then 1,000 AF is subtracted from the Effective Diversion Limit (EDL) for withdrawals from the Carmel River. Currently, that limit is 8,310 AFY, so the new limit would be 7,310 AFY. If the milestone is eventually met during the ensuing year, a portion of the EDL will be restored. If a subsequent milestone is missed, another 1,000 AF is subtracted from the then-current EDL, and so on.

The 2016 Monterey Peninsula Conservation and Rationing Plan (Plan) has specific triggers and actions related to pumping relative to regulatory limits. Typically, the last 12-months of pumping is compared to the then current EDL to see if there is a violation. Certainly, if the EDL is reduced at the beginning of a water year, even without a violation based on the prior 12-months, we will immediately determine if action is warranted. The Plan invokes a series of steps, first a call for increased voluntary conservation, then conservation (penalty) rates, and then finally rationing. These steps are summarized in Exhibit 2-E, as they relate to regulatory triggers. Because the Plan evaluates Carmel River withdrawals in conjunction with Seaside Basin and Sand City desal production, our approach will need to be modified to assess Carmel River pumping relative to the EDL.

Based on the regulatory triggers, the timeline is as follows:

· If 12-month Cal-Am production is greater than the EDL, but less than 105% of the EDL, then Stage 2 is entered and there is a call for additional voluntary conservation with increased enforcement of water waste. If the 12-month production goes below the EDL for 2 consecutive months the Stage is lifted, if 6 months pass without lifting, then Stage 3 is implemented.

· If Stage 2 didn’t work, or 12-month production exceeds 105% of the EDL, Stage 3 is entered. Level 1 of Stage 3 is a period of a 25% surcharge on all rates, except Tier 1 residential customers, for a minimum of 3 months. If over the last 2 of the 3 months the target is still exceeded, the surcharge is raised to 40%. If the 12-month production goes below the EDL for 2 consecutive months the Stage is lifted, if 8 months in Stage 3 pass without lifting, then Stage 4 is implemented.

· If Stage 3 didn’t work, then Stage 4 – Rationing – is entered. Stage 4 first prohibits non-essential water use, with a focus on landscaping, for non-residential and residential uses. Then the residential sector is rationed. If measurable results are not achieved within 6 months, then non-residential uses will be rationed; however, exemptions are provided to “best management practice” (BMP) compliant customers and businesses that require water in their normal course of business (laundromats, nurseries, among others). The reader is directed to pages 5 and 7-10 of Exhibit 2-E for a description of the rationing program.

This is an orderly progression that does not lead straight to rationing. Even in the case where Stage 3 is entered directly, 8 months would pass with rate surcharges before implementing rationing. Another 6 months would pass before non-BMP compliant businesses would be rationed.

However, if the SWRCB believes Cal-Am is not making adequate progress to achieve the revised EDL, they could potentially circumvent the Plan with a direct regulatory order to accelerate to a higher level of penalty rates or rationing, as shown in Exhibit 2-E under “Regulatory Trigger – Regulatory Order” under Stages 2 and 3, or “Regulatory Trigger” under Stage 4.

c) Water Allocation Process Going Forward

Water for new uses is only available from three sources: Jurisdictional Allocations, Entitlements, and Credits.

Credits are created either from permanent abandonment of a Cal-Am use (“Water Use Credit”) or a non-permanent removal of a use on a site which may be later re-used on that site (“On-Site Credit)

Entitlements are the result of a specific water-saving or water creating project that the entitlement holder can then sell or apply to specific benefitted properties. Examples include Pebble Beach as a result of its Reclamation Project or Malpaso Water Company LLC resulting from the Eastwood Trust water right on the Odello East property.

Jurisdictional Allocations are amounts of water allotted to each jurisdiction as a result of several sources: (i) allocations made pursuant to the District’s 1990 Allocation EIR, (ii) 1993 allocations of new capacity from the Paralta Well, (iii) from time to time some jurisdictions developed their own water-saving projects resulting in a public water credit, and (iv) the additional water in the MPWSP beyond existing use. Exhibit 2-F provides a history of the District’s water allocation program. The table below shows the current state of jurisdictional allocations.

Jurisdictional Water Allocations

Jurisdiction	Original Allocation (all sources)	Remaining Allocation
Airport District	8.1 AF	5.2 AF
Carmel-By-The-Sea	21.4 AF	2.7 AF
Del Rey Oaks	8.54 AF	0 AF
Monterey	165.1 AF	2.6 AF
County	108.6 AF	13.0 AF
Pacific Grove	43.1 AF	0.2 AF
Sand City	77.4 AF	23.4 AF
Seaside	102.6 AF	43.4 AF

No new water from the MPWSP will be available for allocation to the cities and the county until the final water supply project comes on line that allows the CDO to be lifted. Once the CDO is lifted, the District will make a determination of how much water supply is available for new uses over and above existing uses. From that amount, a portion will be allocated to the jurisdictions. It is that future allocation process that should be discussed at the Special Joint Meeting. The allocation process will require an EIR and will invariably take time for all affected parties to participate. The process should start 18 months to 2 years from completion of the last increment of water supply.

d) How can our agencies best support each other in advancing our missions and meeting the needs of our community?

Attached as Exhibit 2-F are the mission and powers of the Authority and District. Not all powers have been actively pursued by the Authority or District, and each entity has prioritized its activities periodically to meet the desired strategic outcomes of each respective board.

EXHIBITS

2-A Summary of Testimony Related to MPWSP Demands and Supplies

2-B Table of Historical Water Demand in Cal-Am Main Service Are

2-C CPUC Schedule for MPWSP

2-D State Water Board CDO Milestones for MPWSP Progress

2-E Summary of Provisions of the 2016 Monterey Peninsula Conservation and Rationing Plan

2-F History of District’s Water Allocation Program

2-G Mission and Powers of the Authority and District

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