ITEM:		ACTION ITEMS
15.	CONSIDER APPROVAL OF Aquifer Storage and Recovery MANAGEMENT AND OPERATIONS Agreement BETWEEN MPWMD AND California American Water
Meeting Date:			February 23, 2006	Budgeted:	N/A
From:			David A. Berger,	Program/	N/A
			General Manager	Line Item No.:
Prepared By:			Joe Oliver	Cost Estimate:	N/A
General Counsel Approval: Yes
Committee Recommendation: Pending
CEQA Compliance: N/A

SUMMARY: The Board will consider the proposed agreement between the Monterey Peninsula Water Management District (MPWMD or District) and California American Water (Cal-Am) regarding Management and Operation of the Seaside Basin Aquifer Storage and Recovery (ASR) facilities. The purpose of the ASR project is to benefit water supply and environmental conditions in the Carmel River and Seaside Groundwater Basins. The proposed agreement (Attachment 15-A) is the product of negotiation between respective management staff and legal counsel of the District and Cal-Am. This agreement is intended to satisfy the requirements of the California Department of Health Services (CDHS) regarding use of the District’s Santa Margarita Test Injection Well (SMTIW) as a supply source for the Cal-Am system. In addition to clarifying joint efforts, needed cooperation and respective ownership rights, of and between MPWMD and Cal-Am on the present ASR facilities, the proposed agreement will serve to facilitate plans being undertaken by both entities to expand and make permanent--on an accelerated basis, ASR project facilities and their operations.

The proposed agreement was last discussed by the Board at its January 25, 2006 special workshop on the ASR program. At the workshop, comments regarding the agreement were discussed and are addressed under this item.

RECOMMENDATION: Staff recommends that the proposed ASR agreement (Attachment 15-A), be approved and the General Manager authorized to execute it.

BACKGROUND: Since initiating an ASR pilot program in the Seaside Basin in 1996, the District has been cooperating with Cal-Am on installation and operation of ASR test facilities, based on a mutual desire to develop further knowledge and planning of this important water resource project. This cooperative effort, while successful, has been undertaken without a formal written agreement between the parties regarding ASR operations. In July 2004, during the permitting process with the CDHS to allow water from the District’s test injection well, the Santa Margarita Test Injection Well (SMTIW), to be delivered to Cal-Am customers via the Cal-Am distribution system, the CDHS reiterated their requirement that an agreement between the two parties be provided. An agreement was requested by CDHS to show that Cal-Am was authorized by the District to pump water from the SMTIW on a long-term basis. At about this same time, one of Cal-Am’s main Seaside production wells, the Paralta well, had a major equipment failure, necessitating use of the SMTIW on an emergency basis as a back-up supply for the Cal-Am system. The cost and other impacts of this unexpected occurrence on SMTIW operations and maintenance, coupled with District and Cal-Am management recognition that a framework was needed for joint cooperation on future ASR planning, also served as a catalyst for negotiating a proposed agreement.

District and Cal-Am legal counsel and staff began developing the principles of an ASR Management & Operations Agreement in October 2004. The proposed agreement was considered at a Board workshop on June 16, 2005. At this workshop, the Board requested that the District and Cal-Am staffs review and modify the agreement to address specific issues, as summarized in the minutes from the June 16, 2005 workshop (Attachment 15-B). All of the requested revisions have been incorporated into the current version of the agreement that was prepared by the District. In addition, the term length for the agreement has been changed from 20 to 15 years, consistent with the minimum term acceptable to the CDHS. The most recent negotiation meeting was conducted in December 2005, and it is District staff’s understanding that the current version of the agreement is acceptable to Cal-Am, as the document reflects the revised language exchanged between legal counsel for Cal-Am and the District.

The proposed agreement was also discussed as part of an update on the District’s ASR program at the January 25, 2006 Board workshop. At this workshop, several additional questions were raised. Responses to questions that were not completely addressed at the workshop are provided below.

1. What is the value of water rights associated with the ASR agreement? The draft agreement proposes that water rights associated with ASR are to be under joint ownership of the District and Cal-Am. This limits the value of these rights in that neither Cal-Am nor the District can independently exercise these rights without the consent of both parties. Public Utility rate setting will not allow Cal-Am to assess value based on this water right, insofar as Cal-Am has not incurred any expense in obtaining those rights. The California Public Utilities Commission (CPUC) regulates the rates and charges imposed by Cal-Am as a public utility. Cal-Am can earn rates only to defray actual and necessary expenses incurred in the delivery of the utility service, and to earn an authorized return on monies that the CPUC has authorized to be invested in capital facilities. Ownership of the ASR water rights as contemplated in the draft agreement will not count as either an expense, or as an authorized capital investment. Accordingly, Cal-Am will not be able to assess a charge or fee to ratepayers based on the value of the joint water right.

2. In a sense, would the public (i.e., ratepayers) be paying twice for water rights under this agreement? No, because it would not be possible for Cal-Am to pass along costs associated with this joint water right for the reason stated above. If, however, the District were to charge Cal-Am for its use or ownership of the ASR water right, then Cal-Am would properly request, and the CPUC would be required to allow Cal-Am to pass this cost through to the ratepayers. In effect, ratepayers would then be required to pay twice for the cost of water rights.

3. Could Cal-Am “sell” water rights associated with ASR under this agreement to another party? Under the proposed agreement, such a sale, or assignment, could not be made without advance written permission of the District.

4. Should water rights associated with ASR be licensed, such as a franchise, as opposed to joint ownership? While creation of a franchise or long term license of the water right is an alternative to joint ownership, Cal-Am has been steadfast in its contention that it will not accept these alternatives to joint ownership. Since SWRCB Order 95-10 was issued, Cal-Am has been operating without the benefit of adequate water rights to cover for present production from its Carmel Valley sources. Use of a water right that does not include ownership does not appear to be acceptable to Cal-Am because it injects an element of uncertainty for future years, at which time the license or franchise might lapse or be subject to renewal.

5. Does the District have adequate protection and control over the District’s ASR Facilities in the event of the need for Cal-Am to utilize these facilities during interim or emergency use? Operation of the District’s ASR Facilities is described under Sections 5 and 6 of the proposed agreement. These sections refer operational protocols to the SMTIW Operations and Maintenance Manual, which is Exhibit A of the agreement, and is included with Attachment 15-A herein. To provide additional clarification regarding interim or temporary use of the District’s ASR Facilities outside of injection and extraction procedures associated with normal ASR operations, the District proposes adding the following language (shown in bold) to Section 3.0 II. A. of the manual:

c.) Alternate startup/shutdown procedure to accommodate CAW operational conditions necessitating interim or temporary use of the SMTIW:

        1.    CAW notifies MPWMD that startup of SMTIW needed for a temporary specified time period, due to a CAW well or wells being taken offline.

        2.    MPWMD acknowledges SMTIW use for this purpose.

        3.    Startup/shutdown procedures as described in Sections 3.0 II. A. a.) and b.) above shall be followed for this use of the SMTIW.

In addition, the District proposes adding the following language to Section 1.0 to clarify the process for making revisions to the manual:

All updates to this document will be made with the mutual written consent of the CAW and MPWMD general managers, and copies of the latest updated version shall be kept at the SMTIW site, and at both the CAW and MPWMD offices.

The above proposed language to the Operations and Maintenance Manual has been provided to Cal-Am and the District is awaiting concurrence on these revisions from Cal-Am.

IMPACT TO RESOURCES: Approval of the proposed agreement will result in payment by Cal-Am of all operating and maintenance costs for the District’s ASR test injection well, estimated at an annualized cost of $65,000. This cost is not currently included in the FY 2005-06 District budget. Of course, there would not be savings to most District residents and businesses, as they would ultimately pay these ASR costs through Cal-Am customer service rates.

ATTACHMENTS

15-A Proposed Agreement Titled: Aquifer Storage And Recovery (ASR) Management and Operations Agreement between California American Water and Monterey Peninsula Water Management District, including its Exhibit A, SMTIW Operations and Maintenance Manual.

15-B Draft Minutes, Special Meeting/Board Workshop, June 16, 2005

U:\staff\word\boardpacket\2006\2006boardpackets\20060223\ActionItems\15\item15.doc

Revised 2/6/06, 1515 hr