10. Overview of Proposed
Settlement Agreement
Rule 12.1(d) of our Rules of Practice and Procedure states that settlements will not be approved unless the settlement is reasonable in light of the whole record, consistent with law, and in the public interest. Here, we have a contested settlement; however, it is supported by many factions within the community that represent several of the affected interests, including the environmental community. We commend all of the parties for their diligent work in negotiating difficult public policy issues. We also commend ALJ Bruce DeBerry, who was the mediator for the lengthy ADR sessions that resulted in this settlement.
Cal-Am, MCWD, MCWRA, MRWPCA, Surfrider Foundation, Public Trust Alliance, and Citizens for Public Water are all active parties in this proceeding and have agreed that the Regional Project provides the most expeditious, feasible, and cost-effective alternative to address the water supply constraints on the Monterey Peninsula. We refer to MCWD and MCWRA as the Public Agencies. The Settling Parties contend that the Regional Project "(i) addresses the water supply constraints in Monterey County in a way that best serves (a) community values, (b) recreational and park areas, (c) historical and aesthetic values, and (d) influence on the environment, (ii) is by far the least costly and the most environmentally benign, (iii) is the most and perhaps only feasible project alternative, and (iv) best conserves and protects public trust assets, resources, and values impacted by providing a water supply."52
The Settling Parties also maintain that time is of the essence, both because of the pending Cease and Desist Order and because there are financing opportunities that may be lost if the Regional Project is delayed. The Settling Parties contemplate obtaining tax-exempt private activity bonds and/or low-interest State Revolving Fund financing allocated for 2010, as well as various grants that may be budgeted for 2010. These parties also recognize that there is a favorable construction climate in California, due to the generally weak economic conditions.
As proposed in the Settlement Agreement, MCWRA will construct, own, operate, and maintain the brackish source water wells that will provide the feedwater for the desalination facility, as well as the conveyance pipeline to the desalination facility. MCWD will construct, own, operate, and maintain the desalination plant and transport the desalinated water to a delivery point within its service territory. At that point, MCWD will receive a portion of the water and Cal-Am will receive a portion of the water. Cal-Am will construct, own, maintain, and operate three large diameter conveyance pipelines, two distribution storage reservoirs, and aquifer storage and recovery facilities; all of these facilities will provide the infrastructure to serve its customers with the desalinated water (also known as product water). The brine from the desalination plant would be discharged through the outfall owned and operated by MRWPCA.
As conceived, both MCWD's and MCWRA's participation in the Settlement Agreement are essential to the feasibility of the Regional Project. First, MCWD has an executed option to annex portions of the Armstrong Ranch, where the desalination plant is proposed to be located,53 and the MCWD facilities are located within the Salinas Valley. Because the source water cannot be exported from the Salinas Valley, this factor becomes a critical component to the Regional Project. In addition, according to the provisions of Monterey County Code Chapter 10.72.30(B), private ownership of a desalination plant is prohibited. Second, MCWRA must satisfy the requirements of the Agency Act and protect the farmers and agribusinesses that participate in and fund the Salinas Valley Reclamation Project, CSIP, and the Salinas Valley Water Project. The settling parties contend that absent the participation of both MCWD and MCWRA, years of litigation are likely to ensue. For example, witness Lowrey of MCWD testifies that the cooperation between MCWD and MCWRA "would be legally useful to the Regional Project and that water developed by the MCWRA was a factor in the analysis of the right to use brackish water for the Regional Project. . . The WPA provides a cooperative framework for ongoing technical testing and physical solutions to potential water rights issues, mitigating the need for court action to establish such a framework and such solutions."54
The Settlement Agreement includes two implementing agreements: a Water Purchase Agreement and an Outfall Agreement. The Water Purchase Agreement provides extensive detail as to each party's rights and responsibilities, and addresses the design, construction, and permitting of the components of the proposed Regional Project. The Outfall Agreement commits sufficient capacity in the existing MRWPCA's outfall such that MCWD can discharge the brine.55 These agreements are complex and detailed, and will be discussed below. We provide a general overview of the agreements to provide context for our discussion of the Settlement Agreement. As proposed, Cal-Am and the Public Agencies are parties to the Water Purchase Agreement. The Water Purchase Agreement:
1. Has an initial term of 34 years, with 6 automatic renewal terms of 10 years each;
2. Requires the construction of test wells, the data from which will be analyzed by MCWRA to ensure compliance with the Agency Act (such that groundwater is not exported from the Salinas Valley Groundwater Basin);
3. Addresses financing for the project facilities, which for MCWD and MCWRA is to include low-cost State Revolving Fund loans, as well as grants, where available, which is expected to lower the cost of the Regional Project. Cal-Am will provide shortfall financing for the project, if necessary;
4. Pursuant to the Outfall Agreement, MCWD will connect and use capacity in the ocean outfall components of MRWPCA's regional treatment plant to carry the reject water and brine discharged from the desalination plant. MCWD will pay all costs related to the construction of a connection to the MCWD facilities and a brine receiving facility that are attributable to and used for the discharged brine. The Outfall Agreement also provides for a one-time capacity charge that MCWD will pay to MRWPCA and fair and reasonable O&M costs attributable to MCWD's use of the brine-receiving facility and the outfall discharge, as well as capital repair and replacement costs. Like the Water Purchase Agreement, the term of the Outfall Agreement is 34 years, with 6 automatic 10-year renewals;
5. Whether the facilities are owned and operated by MCWD, MCWRA, or Cal-Am, the costs of the entire project are expected to be borne by Cal-Am ratepayers. MCWD's and MCWRA's costs of constructing and operating their portions of the Regional Project facilities will be included in the calculation of the costs of the desalinated water (or product water), which will be charged to Cal-Am under various provisions of the WPA. In addition, all costs incurred by MCWD under the Outfall Agreement will be included in the cost of the product water;
6. As proposed in the Settlement Agreement, all costs addressed in the Water Purchase Agreement or Outfall Agreement and any shortfall financing provided by Cal-Am will be considered to be reasonable and prudently incurred, if approved by the Commission. Costs for the Regional Project include capital costs, financing costs, costs of obtaining indebtedness, a reserve fund for needed replacements, contingency costs, and O&M costs;
7. Cal-Am proposes to recover the costs of the product water through a Modified Cost Balancing Account, which is currently used to recover the costs of purchased water;
8. For the Cal-Am facilities, Settling Parties propose that, once constructed, the conveyance, pumping, and reservoir facilities will be designated as used and useful for ratemaking purposes, even if the Regional Project is delayed for some reason. The parties contend that this approach is reasonable because these facilities provide important utility services that resolve two operational limitations of Cal-Am's existing distribution system: 1) the facilities will allow Cal-Am to maintain adequate water levels in the Forest Lake tanks during maximum day demand and 2) the facilities will allow Cal-Am to move water from the Seaside area to the rest of the Monterey Peninsula. Cal-Am states that resolving these operational issues will provide increased storage to meet emergency and fire conditions and will increase fire flow capability to Seaside, Monterey, and Pacific Grove. The transfer pipeline used to deliver desalinated water downstream from the delivery point to the Cal-Am facilities throughout its distribution system will not be deemed used and useful until the Regional Project is completed. Cal-Am will include costs related to the construction of its facilities in rate base, either as Construction Work in Progress or Utility Plant in Service. Settling Parties propose that all project costs will earn a return on the carrying costs for the project (i.e., Allowance for Funds Used During Construction (AFUDC) until such time as they are allowed in rate base;
9. Cal-Am plans to file semi-annual advice letters to move the costs into rate base and Cal-Am will continue to adjust base rates until the entire project is closed out to Utility Plant in Service. Cal-Am proposes to file Tier 2 advice letters to modify rate base and to adjust rates; and
10. Finally, Settling Parties recognize the significant rate impact of the Regional Project and recommend that the Commission expand eligibility of customers for Cal-Am's low-income ratepayer assistance program and adopt a more progressive rate design.
We turn now to the Water Purchase Agreement, which provides important details for implementation of the Settlement Agreement.
52 Motion to Approve Settlement Agreement at 5-6.
53 Exhibit 357.
54 Exhibit 361 at 2-3.
55 Although the Motion to Approve Settlement Agreement asks that the Commission approve both the Water Purchase Agreement and the Outfall Agreement, parties have clarified on the record that they do not expect the Commission to approve or have oversight over the Outfall Agreement, which is an agreement exclusively between MCWD and MRWPCA.
