ITEM:		DISCUSSION ITEM
15.	MONTEREY PENINSULA WATER SUPPLY PROJECT (MPWSP) CPUC PROPOSED DECISION ON APPLICATION 12-04-019; DISCUSS DISTRICT COMMENTS AND AUGUST 22^ND ORAL ARGUMENTS
Meeting Date:			August 20, 2018	Budgeted:	N/A
From:			David J. Stoldt	Program/
			General Manager	Line Item No.: N/A
Prepared By:			David J. Stoldt	Cost Estimate:
General Counsel Approval: N/A
Committee Recommendation: N/A
CEQA Compliance: This action does not constitute a project as defined by the California Environmental Quality Act Guidelines Section 15378.

DISCUSSION: On August 13, 2018 the California Public Utilities Commission (CPUC) issued its proposed decision regarding the Monterey Peninsula Water Supply Project (MPWSP) application A.12-04-019 of California American Water Company (Cal-Am). The CPUC is expected to act on the proposed decision at its September 13^th or September 27^th meetings. Their action would include certification of the Final Environmental Impact Report, issuance of a Certificate of Public Convenience and Necessity (CPCN – in effect, permission to build the 6.4 MGD desalination plant), and issuance of a final decision. Comments on the proposed decision are due by September 4^th and oral arguments are scheduled for August 22^nd.

The proposed decision is summarized below and can be found on the District’s website at:

http://www.mpwmd.net/water-supply/water-supply-project/technical-aspects/cpuc-proposed-decision-on-application-12-04-019/

or use the “Water Supply” menu and click on “Monterey Peninsula Water Supply Project”.

The document is 196 pages, so not included with this staff note. It is accompanied by 9 appendices, which will be posted to the web as they become available:

APPENDIX A – Procedural History

APPENDIX B – Parties Positions on Supply and Demand

APPENDIX C – CEQA/NEPA Findings

APPENDIX D – Mitigation Monitoring and Reporting Program

APPENDIX E – FEIR/EIS Errata

APPENFIX F – Modified Comprehensive Settlement Agreement

APPENDIX G – Modified Sizing Settlement Agreement

APPENDIX H – Return Water Settlement

APPENDIX I – Brine Discharge Settlement

SUMMARY: Key aspects of the proposed Order include the following:

· The Final Environmental Impact Report is certified

· A Certificate of Public Convenience and Necessity is granted for a 6.4 MGD desalination plant.

· If the return water obligation under the Monterey County Water Resources Agency Act is greater than an average of six percent (6%) for years 0-7; four percent (4%) in years 8-15; or 1.5% annually from year 16 forward, ratepayers will not bear any costs for meeting the return obligation above these amounts.

· The cost cap for the MPWSP and the remaining Cal-Am Only Facilities is $279.1 million excluding the amounts authorized in D.16-09-021 (the Monterey Pipeline.) To expend funds that Cal-Am intends to recover from ratepayers beyond the capital cost cap, Cal-Am must file a petition to modify the decision.

· Rate recovery for any Operations and Maintenance expenditures will not be authorized absent prior Commission authorization as part of the first general rate case after the Monterey Peninsula Water Supply Project is in operation.

· The Construction Funding Surcharge set forth in the decision is authorized and will be included in a Tier 3 advice letter adjusting the financing framework set out in the Comprehensive Settlement Agreement.

· Cal-Am shall file an application with the Commission requesting issuance of a financing order to allow for the securitization financing (District public financing) option consistent with this decision.

· Cal-Am shall submit a Tier 2 advice letter to reflect the service area extensions set out in Section 5 of the Return Water Settlement to provide water to Castroville Community Services District and Castroville Seawater Intrusion Project.

The Order will also close the Application, effective the date of the final decision.

The proposed decision also made certain findings and conclusions of law, as noted below:

Sizing and Demand: The CPUC stated its goal was to ensure a public water system can meet the maximum daily demand and for a system of Cal-Am’s size to meet peak hour demand for 4 hours in a day with source capacity, storage capacity, and/or emergency connections. Further, the CPUC concluded that projecting any future demand amount less than approximately 14,000 afy presents unreasonable risk without commensurate public benefit.

The CPUC stated that it felt assertions by some parties that the downward trend in water use in the District will continue and that only minimal growth will occur in demand after 2021 are not convincing. Cal-Am has met its burden of proof in that its forecast of demand when weighed with those opposed to it has more convincing force and the greater probability of truth. Cal-Am has shown that its forecast of demand considers the maximum day demand and peak hour demand for the past ten years. Cal-Am has met its burden of proof that its projections of future demand are reasonable in the circumstances of this case.

The Commission is not persuaded that it can rely upon the offers made by Marina Coast Water District or the proposed PWM expansion as available sources of water to Cal-Am, stating: “The Commission cannot rely upon the concept of potential expansion of the PWM project absent more concrete and specific information to find that additional supply is available to Cal-Am. Even if completed, PWM expansion alone fails to provide sufficient supply to meet the average demands assumed in MPWSP planning, and will not provide sufficient supply flexibility to meet most peak demands.”

Source Water: In order for Cal-Am to possess appropriative rights to fresh water under a “developed water” legal basis whereby the MPWSP essentially creates a new water source, Cal-Am would need to be able to demonstrate that any withdrawal of basin water that is not ocean water would not injure or harm other existing basin water rights holders. There is no permit regime for such an appropriative water right, hence Cal-Am cannot obtain a water rights permit before MPWSP implementation. The MPWSP will primarily draw seawater, but could draw some brackish water that includes fresh water, but is not expected to intersect with or draw fresh water on its own. Such brackish water is not used and useful in its existing state, therefore the withdrawal of the fresh water component of the source water is not expected to cause harm or injury to existing legal water users. Cal-Am proposed that basin groundwater could be extracted without harm to existing lawful water uses by returning desalinated product water into the basin in the amount of the fresh water molecules that originated in the basin that are included in the withdrawn brackish water. The CPUC stated “Cal-Am’s extraction from the Basin will not harm the quality of the Basin water, and over the years by returning supply water to the Basin the MPWSP will ultimately benefit the Basin groundwater users” and “The record supports the likelihood that Cal-Am will possess legal water rights for the MPWSP and that the MPWSP is not made infeasible by concerns over water rights.”

Coordination with State Water Board: The timing associated with water supply constraints is governed by the orders issued by the State Water Resources Control Board, including but not limited to WR 95-10 (July 6, 1995), WR 2009-0060 (October 20, 2009) and WR 2016-0016 (July 19, 2016), and deadlines required of Cal-Am for certification of milestone compliance reporting stemming from those orders. Because of the timing of the State Water Resources Control Board Cease and Desist Orders, this decision should be effective on the date of the final decision.

Balance of Ratepayer Risk: There may be some risk with the use of slant well technology for the MPWSP, as such project risk should be appropriately apportioned between ratepayers and shareholders. Further, any sale of excess desalinated water should inure to the benefit of Cal-Am ratepayers, who are providing the vast majority of the funding for the MPWSP, and should correspondingly benefit from any sales of the product water.

If the MPWSP goes offline for any reason other than routine maintenance or operates below a reasonable capacity for four (4) weeks or more Cal-Am is to notify and confer with the Commission and may require the estimated amount that loss of operation is costing ratepayers and a mechanism to refund/credit ratepayers for such amount. For a more extended outage, if the MPWSP is offline, or slant wells fail to produce at a level that is cost effective for ratepayers for two (2) or more months, Cal-Am is to immediately notify the Commission and to propose a process to have the plant back online with a timeline, or to remove the MPWSP from rates and determine an appropriate mechanism to reimburse ratepayers for any recovery of costs for the time the MPWSP is not used and useful.

The Commission must retain its authority to ensure that Cal-Am ratepayers are paying cost-based rates related to the MPWSP, and its discretion to verify that these costs are appropriate, are project based, and do not include any costs that would otherwise be paid by the Public Agencies in the normal course of business. The Public Agencies have their own transparent processes and procedures. To the extent that these agencies, in exercising their duties to be accountable to their constituencies, find that particular aspects of the MPWSP are not reasonable and cost effective, it is reasonable to require Cal-Am to bring this issue to the Commission for its review and consideration, by filing the appropriate pleading.

Previous Settlement Agreements: The CPUC declined to adopt the Comprehensive Settlement Agreement filed on July 31, 2013 given its age, and that many of the provisions are either moot or require modifications. They do agree that the framework set forth in the agreement provides an appropriate structure, supported by the record, for operations and maintenance costs, financing, ratemaking, and contingency. The CPUC also rejected the Sizing Settlement Agreement, filed on July 31, 2013 stating this settlement is no longer relevant, and that the issues included in it are fully addressed in the decision and decided based on record evidence and the FEIR/EIS. They did adopt the Return Water Settlement and the Brine Discharge Settlement.

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