WATER SUPPLY PLANNING COMMITTEE
ACTION ITEM
2.	CONSIDER ADOPTION OF REIMBURSEMENT METHODOLOGY AND AMENDMENT 2 TO COST SHARING AGREEMENT FOR PURE WATER MONTEREY
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: Action does not constitute a project as defined by the California Environmental Quality Act Guidelines section 15378.

SUMMARY:  In May 2013, the Monterey Peninsula Water Management District (District) entered into a Cost Sharing Agreement (Agreement) with Monterey One Water (MOW, at the time Monterey Regional Water Pollution Control Agency) to fund the Groundwater Replenishment (GWR) Project planning and development costs, also referred to as pre-construction costs. 

In April of 2017, MOW’s State Revolving Fund Loan was approved to support the payment of GWR/Pure Water Monterey (PWM) project costs, providing the opportunity to reimburse pre-construction costs from the State Revolving Fund loan.

To formalize this action, as well as incorporate additional terms to support the continued relationship between the parties, a second Amendment to the Cost Sharing Agreement is needed.

MOW’s Budget and Personnel Committee (BPC) met to discuss the amendment at its September 8, 2017 meeting, at which time the BPC directed MOW staff to pursue reimbursement of MOW funds; however, they suggested that consideration be given to the District waiving reimbursement of their costs, for reasons described under “BACKGROUND” below.

At the District’s September 11, 2017 Administrative Committee meeting, the Committee approved the proposed form of amendment, as well as an alternate version, where the District would not participate in funding the debt service reserve fund and the initial reimbursement proportions would be different.

The District’s full board approved either of both versions on consent at its September 18, 2017 meeting.

At MOW’s September 25, 2017 full board meeting, the reimbursement proposals were discussed and staff was directed to develop a series of talking points to be conveyed to the District by the MOW board Chair, in support of the District giving consideration to waiving reimbursement of their costs. Such talking points are summarized under “BACKGROUND” below.

Both parties’ board Chairs and general managers met on October 4, 2017, at which time the District strongly expressed that it does not agree to waive its reimbursement. The District also provided its own talking points in response to MOW, which are summarized under “BACKGROUND” below.

As a result of the discussion between the parties on October 4^th, the board Chairs and general managers agree that the revised proposal (Exhibit 2-A) hereto represents a compromise which (i) is fair to both parties, (ii) provides for potential future reimbursement of pre-construction costs in a manner that bring both parties closer to proportional reimbursement, and (iii) leave the door open for a future contribution by the District to help reduce the wholesale cost of product water.

RECOMMENDATION:  The General Manager recommends the Committee recommend the Board approve Amendment 2 to the Cost Sharing Agreement with MOW for the Pure Water Monterey Project.

BACKGROUND:  Under the Cost Sharing Agreement adopted in May 2013, beginning with Fiscal Year 2013-14, MOW agreed to fund 25% of all costs listed in Section II (A)(1, 2) of the Agreement, while the District agreed to pay for 75% of the specified costs. In July 2016, the parties entered into Amendment 1 to the Cost Sharing Agreement to increase the number of fully-funded MOW positions covered and support the costs associated with the line of credit.

After approval of MOW’s State Revolving Fund Loan in April of this year, project costs through February 28, 2017 concluded the pre-construction costs covered by the Cost Sharing Agreement. All eligible costs incurred after that period were paid by MOW and subject to reimbursement by the State.

Staff of MOW and the District agreed to apply for $8.2 million in initial reimbursements from the State Revolving Fund loan, in concept with the reimbursement shared equally between the organizations. The Agency’s $4.1 million share of the reimbursements was earmarked to replenish and increase reserve balances.

At the September 8, 2017 MOW BPC meeting, there were still on-going discussions between both parties. Staff was initially considering a recommendation for an equal distribution of the $8.2 million initial reimbursement, an equivalent contribution to establish the PWM debt service fund, and that any future distributions be based on the proportional share of costs or a true-up to that level. As stated above, at the BPC meeting, MOW staff was directed to pursue reimbursement of MOW funds, and to suggest that the District give consideration to waiving reimbursement of their costs.

MOW Talking Points: On October 3, 2017, MOW provided to the District several talking points for giving consideration to waiving its reimbursement. The points are summarized below:

• There was no provision in the original Cost Sharing Agreement, or Amendment 1, to reimburse the District for their contributions.

• The District levies a fee, its Water Supply Charge, to support alternative water projects.

• MOW needs to stabilize its financial status, especially as it has capital improvement needs system-wide separate from PWM. MOW has no way to replenish reserves without such reimbursement or raising rates.

• MOW’s funds were originally set aside to support wastewater projects, and were ‘lent’ to PWM while deferring needed wastewater investment.

• The District has supported other projects where its investments are similar to a grant.

• The District’s boundaries and California American Water Company (Cal-Am) service area are very close to overlapping, and if the District allocates its reimbursement back to the project the wholesale cost of water to ratepayers will be reduced.

• The District has already pledged to support PWM costs that may be in excess of the Cal-Am revenues. By extension, “buying down” the initial cost of water will help keep costs closer to the already approved $1,720 per acre-foot “soft cap” on the initial cost of water approved by the California Public Utilities Commission (CPUC.)

• The Agency’s preliminary numbers indicate that MOW’s proportional investment is approximately 37.1% or $7.2 million, with the District contributing 62.9% or $12.3 million. This amount is subject to reconciliation by both entities and could be adjusted based on any additional costs outside of MOW’s accounting records or any disputed costs.

District Talking Points: On October 4, 2017, the District provided to MOW several talking points for giving consideration to waiving its reimbursement. The points are summarized below:

• The District rejected waiving reimbursement.

• While there was no provision for reimbursement in the Cost Sharing Agreement, the District asserts that both parties knew this was the intent since 2013 and that the District adopted its own “reimbursement resolution” in December 2012 and repeatedly urged MOW’s general manager at that time to do the same. In 2015, MOW asked the District for a copy of its reimbursement resolution, again signaling knowledge that reimbursement was the intent.

• Both agencies are reimbursing monies taken from ratepayers. The District’s Water Supply Charge is simply a water rate charge with limited purposes. Further, with the recent reinstatement of the District’s User Fee, its Water Supply Charge will be forced to sunset in whole or in part, so the District lacks any extra resources to stabilize our financial status.
• During the course of the project we have severely tapped our reserves due, exacerbated by several unanticipated mid-year budget increases for the project. The District’s FY2017-18 budget and its economic stability depends on some level of reimbursement.

• The District recognizes that there is, in fact, a wastewater component to the project, so some wastewater revenues can be used for the purpose.

• This is not analogous to the District’s grant funding. The District does sponsor grants for local water projects, but for large capital projects, such costs would be reimbursed and added to the capital costs and repaid on an ongoing basis from wholesale water sales, back stopped by the District’s rates and charges. For example, the District adopted a reimbursement resolution for the costs expended on DeepWater Desal.

• It is too soon to ask the District to help “buy-down” the cost of water. The parties have always known that this should be a 2-step process. That is, reimburse both parties’ pre-construction costs now. Then, once the cost of water relative to the CPUC soft cost cap is determined, the District will give consideration to making a contribution to reduce the cost of water. The cost of water is merely a prediction at this time. Until construction nears completion in a year, it is not clear whether the cost of water will be below or above the soft cap. At this time, MOW cannot show that the District’s contribution would bring the cost of water below the soft cap of $1720 per AF. Until that discussion is ripe, there is no reason to waive reimbursement. Further, there are alternate ways to reduce the cost of water, a capital contribution, an annual subsidy over a period of time, or changes in the year-1 cost assumptions, hence until the order of magnitude is known, it is premature to undertake either method now.

• MOW states that it has contributed over $7.2 million in pre-construction costs, but the costs actually subject to the Cost Sharing Agreement incurred by MOW were $6.5 million and those contributed by the District were $12.7 million. MOW included additional costs outside the Cost Sharing Agreement in its total. The District has not charged its labor, legal expenses, or other administrative charges to the project under the Cost Sharing Agreement and suggests that for the purpose of reconciling the current issue regarding reimbursement that the parties only use the costs subject to the Cost Sharing Agreement unless and until the District is fully reimbursed, if ever.

• All reimbursement under agreement between the parties should be subject to any legal and Internal Revenue Service regulations governing reimbursement resolutions.

Proposed Revised Amendment 2: After having met to discuss the matter, the parties propose the attached revised Amendment 2 to the Cost Sharing Agreement (Exhibit 2-A.)

Key provisions are listed below:

Planning and Development Costs Definition

Amends the existing planning and development costs definition.

Add Reimbursement of Planning and Development Costs

Adds a new section to address the planning and development costs reimbursed through the State Revolving Fund (SRF) Loan. This section provides for a 50%-50% initial reimbursement share for each agency and addresses how subsequent reimbursements would be shared between the two agencies, targeting a goal of bringing both parties back in line with proportional reimbursement after subsequent reimbursements.

Add Unreimbursed Construction Period Costs

Adds a new section to address project-related costs that are not allowed to be paid through the SRF loan between March 1, 2017 to June 30, 2019. The State is disallowing certain costs that are not associated with the project design and construction. Such costs include public outreach, regulatory proceedings, groundwater modeling, geochemical monitoring, and regulatory proceedings. This section would provide a mechanism of continued cost sharing on unreimbursed costs.

Add Financing of GWR Unreimbursed Construction Period Costs

Adds a section to state that the District shall pay seventy-five percent (75%) of the Unreimbursed Construction Period costs and MOW shall pay twenty-five percent (25%) of such costs.

Add Debt Service Reserve Fund

Adds a section to address funding the debt service reserve fund. Unlike earlier proposals, there is no shared funding agreement at this time and MOW retains the right to address alternative approaches for the funding of the reserve at the in-service date in the future.

Amending Term

Amends the existing term of the Agreement to remain in effect until June 30, 2019. An extension could occur at the agreement of the parties.

EXHIBITS

2-A Proposed Amendment 2 to MRWPCA-MPWMD Groundwater Replenishment Project Cost Sharing Agreement

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