5. Mediation, PHC, Status Reports and Litigation

On January 18, 2012, Cal-Am filed a Mediation Update, stating that
"[Cal-Am] has determined that it is no longer reasonable to move forward with the Regional Desalination Project and has begun considering alternative desalination projects." Cal-Am explained that it entered into mediation with MCWD and MCWRA on August 11, 2011 and that the mediation concluded on January 16, 2012 because the parties were unable to agree on many issues and challenges related to the Regional Desalination Project. Cal-Am explained that because of the looming deadline related to the water restrictions ordered in the State Water Resource Control Board's Cease and Desist Order, it had to focus on proposing an alternative water supply project as quickly as possible. Cal-Am states that an expeditious decision on its Petition to Modify is still required, since "[w]ith the exception of the transfer pipeline, which is unique to the Regional Desalination Project, the [Cal-Am] facilities would be necessary for any of the
11 alternative projects that have been analyzed and are also essential to take full advantage of the [ASR] system and thereby reduce the Monterey County District's diversions from the Carmel River during low river flow periods."¹³

Although Cal-Am, MCWD, and MCWRA attempted to produce a joint status report, as directed by the ALJ, this proved impossible. In Cal-Am's status report, timely filed on March 1, 2012, Cal-Am described the timeline leading up to its decision to withdraw its support for the Regional Desalination Project:

Date	Action
April 2011	Allegations regarding MCWRA Board Member Stephen Collins' conflict of interest.
Letters dated July 7, 20, and August 22, 2011	By letter to Cal-Am and MCWD, MCWRA stated that Water Purchase Agreement was void based on conflict of interest allegations.
August 11, 2011	Coastal Commission declined to issue permit for test wells, based on conflict of interest allegations and lawsuits regarding California Environmental Quality Act (CEQA).
August 12, 2011	Cal-Am served notice of default of failure to obtain financing to MCWD and MCWRA based on §7.1(a) of the Water Purchase Agreement.
Late August 2011	Cal-Am, MCWD, MCWRA began confidential mediation with Commission-sponsored mediator.
September 28, 2011	Cal-Am served notice by letter to MCWD and MCWRA terminating the Water Purchase Agreement and related agreements.
December 2011	Superior Court Judge issues intended decision re: Ag Land Trust, finding that MCWD is lead agency.
January 16, 2012	Parties were unable to reach agreement and the mediation process concluded.
January 17, 2012	Cal-Am publicly announced its decision to withdraw support of the Regional Desalination Project.

Cal-Am also raised concerns with CEQA. On April 5, 2010, Agricultural Land Trust filed suit against MCWD in Monterey County Superior Court, alleging that MCWD should have been the lead agency, rather than the Commission, that the Environmental Impact Report (EIR) was inadequate and raising certain issues related to water rights. In an intended decision issued in December 2011, the Superior Court found that MCWD should have been the lead agency. In an amended intended decision, issued in February 2012, the Court also determined that certain water rights issues were not adequately addressed in the EIR. Based on those intended decisions, Cal-Am contended that MCWD could either issue its own EIR, appeal the Court's final decision, or vacate its resolutions approving the EIR as a responsible agency and approving action to purchase property known as the Armstrong Ranch (the intended site of the Regional Desalination Plant). Cal-Am adamantly contended that any of those actions would take a substantial amount of time - time that was not available, because of the implications of the Cease and Desist Order. Pursuant to the Cease and Desist Order, Cal-Am must replace 7,062 acre-feet of water no later than December 2016. Cal-Am stated that it would consider supporting the Regional Desalination Project only under the following conditions:

(1) a court ruling that the Water Purchase Agreement and related agreements are valid in light of the conflict of interest allegations;

(2) immediate funding for the Regional Desalination Project from MCWD and MCWRA;

(3) a revised EIR from MCWD addressing the Ag Land Trust issues;

(4) immediate issuance of test well permits;

(5) repayment of the amounts owed to California American Water under the Reimbursement Agreement and the Credit Line Agreement;

(6) an agreement among the three original parties to the Water Purchase Agreement (Cal-Am, MCWD, and MCWRA) to continue under the Commission-approved Water Purchase Agreement, including a determination on how the public agencies would fund their project expenditures in advance of being able to issue debt or to make modifications to a new Water Purchase Agreement that all three parties agreed to and seek approval in a timely fashion from the Commission for such modifications; and

(7) a finding from the Commission confirming that the Regional Desalination Project is the best option to meet the State Water Resource Control Board's requirements.¹⁴

In response to the assigned ALJ's questions, Cal-Am contended that a significant water supply project is required, despite demand management efforts, aggressive leak repair, increased use of recycled water, and use of grey water for landscape irrigation.

In its separately-filed status report, MCWD disagreed with Cal-Am's conclusions and contended that the Commission had to order Cal-Am to move forward with the Regional Desalination Project. MCWD made a number of requests of the Commission, outside of the actual status of the Regional Desalination Project. First, MCWD requested that the Commission order certain actions related to the Water Purchase Agreement parties' obligations. MCWD asked that we apply the statute of limitations to find that the Water Purchase Agreement and related contracts remain valid, despite any alleged violations of Government Code Section 1090 by Stephen Collins. MCWD contended that the Commission should order MCWRA to assign its interests to a party that will undertake those obligations, if MCWRA will not "perform its contractual obligations. . . or face legal action by the Commission."¹⁵ MCWD also requested that the Commission order Cal-Am, MCWD, and MCWRA to perform their contractual obligations related to the Water Purchase Agreement and the Regional Desalination Project. Second, MCWD asked that the Commission determine that "any final decision by the Monterey County Superior Court in the Ag Land Trust cases that purports to review, reverse, correct or annul the commission's final findings that it is the California Environmental Quality Act (CEQA) lead agency and that the Commission's Final Environmental Impact Report (FEIR) is adequate and in compliance with CEQA intrudes on the Commission's decisions, findings, and processes in violation of Pub. Util. Code
§ 1759(a) and the Covalt case."¹⁶ Third, MCWD asked that we reaffirm the findings in D.10-12-016 to the effect that the Regional Desalination Project is the "only viable replacement water supply project for the Monterey Peninsula, as demonstrated in its CEQA Findings of Fact for the Regional Desalination Project."¹⁷

MCWD also contended that Cal-Am was mistaken in its claims that financing was not obtained in a timely manner. MCWD contended that the parties discussed financing regularly and because of market conditions and the desire to obtain low-cost financing, Cal-Am agreed to recognize that its credit line would constitute the initial tranche of the financing plan. Cal-Am contended that such an interpretation was not consistent with the Water Purchase Agreement.

MCWRA recognized that there was substantial uncertainty and potential delay associated with the pending CEQA issues. MCWRA noted that because Monterey County Superior Court did not consolidate the Ag Land Trust lawsuit against MCWRA with the lawsuit against MCWD, it was unclear when these issues would be considered and that the determinations in the MCWD case may not apply to MCWRA. While disagreeing with Cal-Am regarding whether initial financing obtained under Cal-Am's line of credit was sufficient for purposes of
§ 7.1(a) of the Water Purchase Agreement, MCWRA did recognize that no institutional financing has been obtained.

Public Trust Alliance recommended that parties continue to pursue the Regional Desalination Project and that such an approach was consistent with the mandates of the public trust doctrine. Public Trust Alliance also recommends that a public process be put in place to try and address issues associated with
ill-will and distrust.

On April 12, 2012, MCWD filed in the Court of Appeal of the Sixth Appellate District a petition for a writ of mandate against the Superior Court of Monterey County seeking the vacation of the Superior Court's February 29, 2012 order concerning an amended intended judgment in the Ag Land Trust CEQA case on the ground that it unlawfully intruded on the jurisdiction of the Commission. On April 17, 2012, however, the Superior Court of Monterey County entered as a final judgment that amended intended judgment.

¹³ Cal-Am's Compliance Filing - Mediation Update at 2.

¹⁴ Cal-Am Compliance Filing dated March 1, 2012, at 6.

¹⁵ Separate Status Report of MCWD, dated March 1, 2012, at 3.

¹⁶ Id. at 2.

¹⁷ Id. at 15.