3. Background History

In the unincorporated portion of northwestern Orange County there is an approximate 1600-acre area known as the Bolsa Chica. Bolsa Chica is bounded to the north, east, and south by the City of Huntington Beach (the City), and to the southwest by the Pacific Coast Highway and the Pacific Ocean. The Bolsa Chica embraces three general areas: the Bolsa Chica Mesa (the Mesa); the considerable larger area of the Bolsa Chica lowlands (Bolsa Chica wetlands) and the Huntington Mesa. The entire Bolsa Chica lies entirely within the Coastal Zone (as defined by the California Coastal Act), and therefore is subject to the land use planning and regulatory jurisdiction of both Orange County and the California Coastal Commission. Orange County land use regulation is done in accord with the County's General Plan.

In 1979, Signal Landmark owned the Bolsa Chica area, and began working through the County jurisdiction for entitlement to develop the area. By early 1986, a land use plan for Bolsa Chica was proposed and certified by the Coastal Commission. It provided for 5,700 residential units and a marina-commercial complex. But local opposition formed, leading in 1988 to formation of a Bolsa Chica Planning Coalition. The Coalition included State, County, and City representatives, the landowner, and a local environmental group, Amigos de Bolsa Chica (Amigos). The purpose in forming the Coalition was to facilitate negotiation of a revised land use plan for the Bolsa Chica.

Some conflicts were resolved and a concept plan adopted which substantially reduced residential development. By mid-1990, the City and the County signed a Memorandum of Agreement, with the City to be the lead agency to process a new Local Coastal Plan (LCP) and an Environmental Impact Statement/Environmental Impact Report (EIS/EIR). The City took three years in planning studies and drafting EIS/EIRs for the project. Despite the wide public input, when the City finally released its draft EIS/EIR, it drew wide criticism. New opposition groups formed. An organization called the Bolsa Chica Land Trust organized to advocate public acquisition of the Bolsa Chica. The City decided its land use plan should be changed, and the Coalition broke-up when the City left the Coalition.

In view of the City's changed view on development of the Bolsa Chica, the breakup of the Coalition, and processing delays by the City, the Koll Real Estate Group (KREG), then the project Developer for Signal Landmark,¹ determined to exercise its right to process its entitlement requests through the County. The County-City Memorandum of Agreement was cancelled, and the County assumed the lead agency role for development of the Bolsa Chica under the California Environmental Quality Act (CEQA). Late in 1993, the County issued a draft EIR following the land use plan for Bolsa Chica that earlier had been devised by the now defunct Coalition. The draft EIR was revised following public comment and recirculated. The draft EIR provided two alternatives: one provided for 2,500 residential units on the Mesa and 800 units on the lowlands; the second alternative limited residential development to the 2,500 units on the Mesa.

The County Planning Commission following public comment approved the first plan as the LCP for Bolsa Mesa. In April 1995, over objections from the City, the County Supervisors approved a development agreement with the Developer.

In January 1996, after public hearings, the Coastal Commission approved the County's LCP for Bolsa Chica with suggested modifications. In March 1996, in response to a legal challenge from the Land Trust and other groups to the County's adoption of the Bolsa Chica LCP draft EIR, the Superior Court ordered the County to prepare a revised draft EIR so as to reflect a more stable project description, and then to recirculate the revised draft EIR. In June 1996, the County did this. After this was recirculated, the County Supervisors ratified the suggested Coastal Commission modifications and adopted a Final EIR. The Superior Court in 1996 found that the County had complied with its earlier order by recirculating the draft EIR. The Land Trust group appealed in September 1996, and their appeal was rejected by the Court of Appeals in June 1998.

Back in March of 1996, the Land Trust and other community groups also challenged the Coastal Commission's January 1996 approval of the County's LCP for the Bolsa Chica. The Commission approval had included residential development on the wetlands (800 units), the filling of Warner Pond, and relocation of a raptor habitat eucalyptus grove. The Superior Court on August 7, 1997 found against the Commission's approvals as to the wetland development and filling of Warner Pond, but rejected the Land Trust claim that relocation of the eucalyptus grove would result in a significant impact or that there was an inadequate buffer zone. The Coastal Commission modified its LCP accordingly, eliminating wetland residential development and filling of Warner Pond, and again approved the LCP. Various appeals followed, leading to a Court of Appeals decision on April 16, 1999 that, while upholding the Coastal Commission's previous approval of the LCP in all practical aspects except as to the preservation and protection of the raptor habitat eucalyptus grove, ordered Superior Court to remand the Bolsa Chica LCP to the Coastal Commission. Superior Court on June 25, 1999 ordered the Coastal Commission to reconsider the LCP in its entirety, and to conduct a full public hearing on any LCP it proposes before again approving the LCP.

While these Court decisions have no material impact on the design, construction or operation of the proposed pipeline, the area of the Mesa project may require some modifications, particularly as it relates to the area near the eucalyptus grove. This could result in minor relocations of water distribution and sewage collection lines in the project itself.

The LCP is conterminous with the area of the Bolsa Chica Planned Community. That portion of the Planned Community that the Developer projects for residential purposes is the northerly subarea of Bolsa Chica, approximately 230 acres referred to as the "Mesa." The Mesa consists primarily of grasslands ranging in elevation from 7 to 57 feet mean sea level. The Developer plans approximately 1,235 lots, with the development to be primarily of single family detached homes and a limited number of townhouses.

The Mesa, while in the City's sphere of influence, lies entirely in the unincorporated area of the County. In these unincorporated areas of Orange County, the County provides police and fire protection services for any developments, but it does not provide water and sewer services. Typically, water and sewer services are provided either by adjacent cities or by special districts. In the situation present here, the principal alternatives open to the Developer to obtain water and sewer services were either to contract with an adjacent city, or form its own service entity. The adjacent city here was Huntington Beach.

To explore the possibility of obtaining water from the City, in June of 1996 the Developer met with the City Administrator. As inducements the range of discussion included the Developer providing certain capital infrastructure improvements to the City's water system as well as per unit contributions based upon the number of proposed units the Developer would build on the Mesa. The City Council was ambivalent about allowing the City's staff to negotiate with the Developer.² Several members were opposed unless the Developer would agree to further reductions in the density allowed in the Developer's County entitlements, and would agree to apply the City's building standards. However, the Council finally asked its City Administrator to provide a process for discussions and possible negotiations with the Developer. The Council wanted the fiscal impacts to the City to be considered in the process.

By a 4-3 vote in the April 1997 meeting, the City Council rejected the Developer's 1996 water proposals, but agreed to evaluate any new water proposals if proffered. The Council also voted to continue negotiations on library, police, sewer, and traffic agreements.

In the same month (April of 1997), although the City's staff had been precluded from discussing water and sewer services with it, the Developer none-the-less submitted a comprehensive concept proposal regarding City delivery of public services to the Developer's Mesa project. The water component of that proposal (making use of an earlier study by the City) noted the City's need for a reservoir in the vicinity of the Mesa to correct the City's existing pressure problems, and proposed to build and lease a 9-million gallon reservoir site to the City at a dollar a year with the property to pass to the City in ten years. The Developer would contribute $8.75 million of the cost in exchange for the City providing, operating, and maintaining water and sewer facilities to the Mesa development. Other portions of the package deal addressed fiscal benefits relating on fire and emergency medical services, law enforcement and library services. The Developer observed that there had been two years of discussion regarding City provision of services to the Mesa project, and asked for some resolution on the issues.

During the summer of 1997, the Developer also explored with the City of Westminster the possibility of that city furnishing water to the Mesa project. A written proposal was submitted whereby the Developer would provide funding to enable Westminster to make capital improvements to that city's water system in exchange for Westminster furnishing water. In October of 1997, in the face of strong opposition from the Land Trust, the Westminster City Council voted to reject the Developer's proposal.

Well cognizant of the depth of continuing opposition to any development on the Mesa from local groups such as the Land Trust, Amigos, Surf Rider Foundation, Huntington Beach Tomorrow and others, and seeking to explore all alternatives, the Developer had also entered negotiations with Southern California Water Company. This led to a March 1997 agreement for SCWC to provide water through a transmission pipeline from existing sources in SCWC's West Orange County System, to the project. SCWC would also be responsible for operation and maintenance of the on-site distribution system, and for provision of on-site wastewater services.

Meanwhile, following months of meetings, the City's Administrator in October of 1997 informed the Developer that he would not recommend that the City serve water to the Mesa development unless the Developer would agree to annex the Mesa into the City.

Annexation, however, presents significant legal, process and timing challenges to the Developer. Hearthside, the present Developer, and its predecessors have been in land use approval processes with more than 25 public agencies, and in land use litigation with local activist organizations, for almost 30 years with regard to Bolsa Chica development. Throughout these processes the City has taken positions on a variety of matters affecting the property that the Developer construes as being in opposition to development of the Mesa, and sympathetic to delay.

Despite these obstacles, the Developer had obtained a Development Agreement with the County on April 18, 1995 that is valid for 15 years with respect to its development of the Mesa. As an undeveloped area under the County's jurisdiction, this Development Agreement provides the Developer with certain land-use entitlements.³ Hearthside's concern regarding any annexation was that the Developer's hard won and expensively obtained entitlements would then be jeopardized by protraction of the annexation process on the part of the City, and by the virtual certain attendant litigation that would result, designed to delay and/or limit project implementation and prevent ultimate project build-out.⁴

Trying to move the project along, the Developer was proceeding with SCWC.⁵ But when SCWC's engineering contractor approached the City with preliminary plans relating to construction of the interconnecting 18-inch pipeline in the City, the City responded that legally it could not proceed unless SCWC first secured a CPCN from the California Public Utilities Commission (PUC), and that an environmental assessment on the pipeline would be required.

The City Council, at its December 15, 1997 meeting, had asked its staff for an updated report on the Bolsa Chica to include water and other services and any EIR requirements for the proposed pipeline. At its January 20, 1998 council meeting, this report update was received, and the City Administrator was then directed to return with a cost-benefit analysis of annexation. He was also to obtain from the Developer a written statement regarding the Developer's receptiveness to annexation.⁶

The City next hired a small team of outside consultants to work with the City's departments and staff to prepare a report analyzing the fiscal impacts to the city of annexing the Bolsa Chica unincorporated area. Three scenarios were initially examined, using a four-year horizon (consistent with the Developer's four-year build out plan). The three assumed there would be development on the Mesa segment of the Bolsa Chica. The scenarios were: (1) annexation prior to development; (2) development without annexation, and (3) annexation after development.

A draft report was publicly issued on July 29, 1998. Following public workshops (August 28, 1998, September 24, 1998, and November 30, 1998) revisions were made and a fourth scenario was added (annexation without

development). The report on the fiscal trend that would result from annexation showed that annexation in every case would produce a fiscal benefit to the City.⁷

The 18 years of delay and disputes that had held up the Developer in its plans to develop on Bolsa Chica led the Developer to proceed through SCWC or risk losing its investment. Despite the repeated opportunities that the environmental and public interest groups had had during the numerous public hearings, public workshops, and comment periods to express concerns, and the significant opportunities that the City had had to be involved with the Mesa project and to work with the Developer, the Developer felt that negotiations had come to a standstill. With the City's staff precluded from discussing provision of water and sewer services to the Mesa project, it appeared to the Developer that the City was deliberately delaying any final response. To the Developer there appeared to be no other presently available water and sewer services than those offered through SCWC. And this ultimate conclusion led to the contract with SCWC and SCWC's application to the Commission.

1. Annexation prior to development The fiscal impact to the City under this scenario resulted in a negative cash flow the first year after annexation and positive cash flow annually thereafter. The four-year cumulative surplus to the City totaled $1,412,041. 2. Development without annexation This scenario resulted in a negative fiscal impact to the City during the first three years of project build-out. By the fourth year, however, the City begins to realize a surplus ($167,249). This is principally due to required up-front capital expenditures in the initial years to construct a new fire station. The overall cumulative deficit over the four-year horizon is $2,989,749. 3. Annexation after development is complete This scenario assumes annexation in the fifth year, after build-out of the project is complete. During the four years of project construction, while the area remains unincorporated, a total deficit impact to the City of $2,989,749 has been created. After annexation in year five, an annual surplus to the City begins to reduce this deficit. By year eight, the deficit remains, but is reduced to $2,116,896. 4. Annexation without development This scenario results in a small revenue surplus for all four years with a cumulative surplus of $72,575. The fourth-year annual surplus dwindles to under $6,000, however, principally due to expected reductions in oil extraction tax revenues.