Permitted System (Required by MPWMD Rules)

1. The California American Water (CAW) Water Distribution System (Permitted System) is authorized by the Monterey Peninsula Water Management District (MPWMD or District) under Permit #M10-07-L4 to serve the 39.04-acre parcel identified as Assessor’s Parcel Number (APN) 011-501-014, the site of the proposed Monterey Bay Shores Ecoresort (MBSE), based on use of water rights held by the Property Owner, Security National Guaranty, Inc. (SNG). Annexation of the subject parcel was approved by MPWMD as part of Permit #M07-03-L4 (approved October 15, 2007), but service is restricted pursuant to MPWMD Ordinance No. 132 (adopted January 24, 2008). The area to be serviced is shown in Attachment 1. [Rule 22-D-1-a]

2. The Permittee is authorized by MPWMD under this Permit to provide potable water for commercial and residential use (mixed use resort) and associated landscaping to the parcel referenced in Condition #1, in compliance with approvals by the City of Sand City and California Coastal Commission. [Rule 22-D-1-b]

3. The CAW system capacity limit (“production limit”) for allowed extractions from the Coastal Subareas of the Seaside Groundwater Basin shall be increased by up to 90 acre-feet per year (AFY) over the quantity specified in the Seaside Basin Adjudication Judgment of March 27, 2006, Monterey County Superior Court Case #M66343, as amended (“Adjudication Decision”), with the requirement that this 90 AFY amount may only be used on the parcel referenced in Condition #1, and water serving the parcel may only be derived from wells in the Coastal Subareas of the Seaside Groundwater Basin. The expansion capacity (connection limit) is one master connection for the proposed MBSE project, which may employ multiple water meters for effective tracking of water consumption. The combined metered CAW water consumption on the subject parcel shall not exceed 83.7 AFY, based on a system loss factor of seven percent (7%). This factor, and thus the metered sales limit, may be amended by the MPWMD General Manager if documentation satisfactory to the District is provided by CAW to warrant such a change. For the purpose of MPWMD’s Expanded Water Conservation and Standby Rationing Program, up to 90 AFY reserved for the Property Owner will be added to CAW’s recognized allotment, based on the Property Owner’s adjudicated water rights specified in the Adjudication Decision referenced above, so long as CAW and the Property Owner have a valid agreement for CAW’s use of water rights associated with the subject parcel. [Rule 22-D-1]

4. The source of water for the Permitted System is groundwater in the Coastal Subareas of Seaside Groundwater Basin. SNG’s rights to this groundwater were adjudicated in March 2006. Water for the MBSE parcel shall be produced by CAW and delivered to the MBSE parcel through CAW’s water distribution system. All water provided to the MBSE parcel must be derived from Wells in the Seaside Groundwater Basin, consistent with the May 11, 2009 Monterey County Superior Court Order, Case #M66343 (“Court Order”) and the May 18, 2009 Agreement Between Security National Guaranty, Inc. and California American Water Regarding Front-Loading Delivery of Water (“Water Delivery Agreement”). [Rule 22-C-3]

Additional Mandatory Conditions of Approval (Required by MPWMD Rules)

5. Precedent to use of this Permit, Permittee shall also first obtain and comply with any required approval from the local jurisdiction in which the property is located, in this case, the City of Sand City. The California Coastal Commission must also approve a MBSE coastal development permit. This Permit is not valid until the California Public Utilities Commission recognizes CAW’s annexation of the subject parcel identified in Condition #1 through the “Advice Letter” process. The Seaside Basin Watermaster confirmed on September 19, 2008 that CAW may deliver water to the subject parcel using the Alternative Production Allocation water rights held by the Property Owner. The State Water Resources Control Board, Division of Water Rights, confirmed on February 5, 2009 that the one-for-one replacement requirement in Order WR 95-10 does not apply to the MBSE application so long as CAW water supply for the project is derived from the Seaside Basin and not the Carmel River Basin. [Rule 22-D-1-c; Rule 22-D-3]

6. Permittee and Property Owner shall execute an Indemnification Agreement, provided as Attachment 2, which holds the District harmless and promises to defend the District from any claims, demands, or expenses of any nature or kind arising from or in any way related to the District approval of the Permitted System or the adequacy of the system water supply. This Permit is not valid until the Indemnification Agreement is signed by the Permittee, Property Owner and MPWMD. The Indemnification Agreement must be signed within 60 days of the preparation date shown (see top of page 1) for this Permit to remain valid. [Rule 22-D-1-d]

7. Permittee shall comply with District rules relating to water well registration, metering and annual reporting of production (MPWMD Rules 52 and 54). It is noted that two non-CAW wells also exist on the subject parcel, and the Property Owner shall also comply with Rules 52 and 54 for these wells. [Rule 22-D-1-e; Rule 22-D-2]

8. CAW and the Property Owner shall report production by the Water Meter Method (MPWMD Rule 56) for the wells designated in Conditions #4 and #7. [Rule 22-D-1-e; Rule 22-D-2]

9. The Property Owner shall comply with all MPWMD water conservation rules that pertain to CAW customers as applicable to the mixed-use MBSE project (e.g., commercial, hotel, residential, landscape). Current ordinances specify maximum water use rates for fixtures and require new development to install drought-resistant landscapes, and drip irrigation, where appropriate. Contact with the District Permit and Conservation Office at 831/658-5601 is recommended during project planning. [Rule 22-D-1-f]

10. No new Connections to the Permitted System may be set until a Water Permit has been secured from MPWMD for each connection in accordance with MPWMD regulations governing issuance of Water Permits. Connection charges shall be calculated based on water demand estimates using the District’s water demand methodology at the time of the application. [Rule 22-D-1-g]

11. Any intensification or expansion by the Property Owner within the Permitted System shall require a new application and Permit pursuant to MPWMD Rules 23 and 24. [Rule 22-D-1-k]

12. Any new facilities, expansion of service area boundaries, changed conditions regarding water service by other entities, increase in the production or connection limits set in Condition #3, or other changes described in MPWMD Rule 22-E shall require a Permit to amend the Permitted System. [Rule 22-E]

13. No permanent intertie between the Permitted System and any other system intended to provide service to the MBSE parcel shall be allowed without amending this WDS Permit pursuant to Rule 22-E. The MBSE parcel may receive non-CAW trucked-in water or water from the back-up well on the property, as allowed by the Monterey County Health Department, in a non-fire emergency, system failure or similar short-term critical event that prevents CAW from serving the parcel. The term “short-term” is defined as less than or equal to 120 days. The Permittee may apply in writing to the MPWMD Board of Directors for extensions to the 120-day time limit, each to be approved by the Board upon a finding of good cause, and each to be limited to a period of 120 days. Use of trucked-in water shall be guided by MPWMD Rule 173, provided however, that the number of trucks used to transport water shall be minimized to the extent practicable. The subject parcel is within the CAW service area and may receive CAW water for emergency fire service. [Rule 22-D-1-h]

14. A back-flow protection device to prevent contamination of the CAW system is not required as the subject parcel will be served by CAW. However, if use of non-CAW wells on the parcel is contemplated, CAW and Property Owner must take appropriate action to ensure that the CAW system would not be contaminated. [Rule 22-D-1-h]

15. Because the Permitted System is a regulated public utility that provides water to nearly 39,000 customers via an extensive water system, compliance with California Title 22 drinking water standards is already required by State Health authorities. [Rule 22-C-2]

16. Permittee is not required to carry out specific mitigation measures by MPWMD above and beyond those already required by the City of Sand City in its adopted Mitigation Monitoring Plan for the MBSE project (approved December 1, 1998) as refined by the Addendum adopted by the City on January 20, 2009. It is noted that other agencies could refine or amend required mitigation measures.. [Rule 22-D-1-i]

17. Permittee is not required to provide a copy of an agreement to serve water to the recipient parcel because it is within the service area of a regulated public utility. It is noted that the Permittee has provided a copy of an executed Water Delivery Agreement dated May 18, 2009 between CAW and the Property Owner regarding use of 90 AFY of Alternative Production Allocation water rights. [Rule 22-D-1-j]

18. Upon District approval of this Permit, Permittee (and/or Property Owner) shall pay to the District the invoiced cost for MPWMD staff, attorney and consultant time spent to process the Permit subsequent to the application date, if required. The Permittee is not charged for the first 40 hours of staff time or equivalent. The Permittee will be provided documentation to support the invoiced amount. This Permit is not valid until payment for the invoiced amount is received by MPWMD. The payment must be received within 60 days of the preparation date (see top of page 1) for this Permit to remain valid. [Rule 22-D-1-l]

19. Upon finalization of these conditions, the Permittee and Property Owner shall sign and notarize a form regarding acceptance of these Permit conditions for approval of the Permitted System. By signing the form, Permittee acknowledges that Permittee understands and accepts these conditions as a binding part of the Permit approval, and agrees to carry them out faithfully. This Permit is not valid until the signed acceptance form has been received by MPWMD. The Acceptance Form must be received within 60 days of the preparation date (see top of page 1) for this Permit to remain valid. [Rule 22-D-1-m]

20. Permittee and/or Property Owner shall disclose to any future owner, successors and assigns of the property described in Condition #1 (including owners of any future subdivided lot) the requirements for the Permitted System associated with this Permit. MPWMD shall be advised in a timely manner of any changes in system ownership, system name, or other substantive changes to the system to facilitate accurate record-keeping. [Rule 22-D-2]

21. Construction tasks for water facilities authorized by this Permit (e.g., service connection pipelines to the MBSE parcel described in Condition #1) shall be initiated within one year from the latter of (i) the date this Permit is issued, or (ii) the issuance of the Coastal Development Permit, if applicable. This Permit shall expire if no action is taken within that year. Water delivery to the MBSE parcel shall commence within two years from the latter of (i) the date this Permit is issued, or (ii) the issuance of the Coastal Development Permit, if applicable. Permittee may apply in writing to the MPWMD General Manager for a 180-day extension to either of these deadlines, to be approved at the discretion of the General Manager. [Rule 22-D-4]

22. Permittee shall ensure that the Property Owner of parcel APN 011-501-014 shall execute a Deed Restriction prepared by MPWMD regarding the limitation on water use as set forth in these conditions. Permittee shall pay all fees associated with preparation, review and recording of the Deed Restriction. The Deed Restriction must be signed and notarized by the Property Owner, and accepted by the Monterey County Recorder for processing within 180 days of the issuance of the Coastal Development Permit before a signed WDS Permit from MPWMD is transmitted to the Permittee. [Rule 22-D-1-n]

23. The Permit granted herein is subject to revocation in the event Permittee and/or Property Owner do not fully comply with each and every condition set forth in this Permit #M10-07-L4. [Rule 22-D-1-o]

Other Conditions of Approval

24. Nothing in this Permit shall be construed to grant or confirm any water right.

25. This Permit does not authorize any act that results in the taking of a threatened or endangered species or any act which is now prohibited, or becomes prohibited in the future, under either the California Endangered Species Act (Fish and Game Code Sections 2050 to 2097) or the federal Endangered Species Act (16 U.S.C.A. Sections 1531 to 1544). If a “take” will result from any act authorized under this Permit, the Permittee shall obtain authorization for an incidental take prior to construction or operation of the project. Permittee shall be responsible for meeting all requirements of the applicable Endangered Species Act for the project authorized under this Permit.

Special Conditions of Approval

26. District technical staff shall have reasonable physical access to the two existing dedicated monitor wells (#15S01E15F1 and F2) owned by MPWMD that exist on the subject parcel, and the Property Owner’s production well on the MBSE site (APN 011-501-014) for purposes of taking hydrologic measurements associated with water quality and quantity and/or to verify that they are properly maintained. Currently, data from the monitor wells are used by the MPWMD and the Seaside Basin Watermaster. Should modifications to the monitor wells to enable proper functioning and data collection be necessary due to MBSE construction and operation activities, these expenses shall be borne by the Property Owner.

27. The Property Owner and its successors shall provide copies to the District of any report required by the Watermaster, such as monthly water levels in its production well(s), the amount of water produced on a quarterly basis, and certain water quality test results on an annual basis each fall. Permittee shall annually provide to MPWMD a table of metered consumption records for all CAW meters serving the MBSE on the subject parcel for the period October 1 through September 30; this report shall be provided by November 30 of each year. The purpose of these data is to verify that the metered sales limit defined in Condition #3 is not exceeded. If deemed necessary by the MPWMD General Manager, the reporting period may be required to be more frequent (monthly or quarterly).

28. Property Owner, and its successors, shall give notice to MPWMD and provide copies to MPWMD of any required correspondence by the Watermaster associated with transferring the type of right to produce water from the Seaside Basin from an Alternative Production Allocation right to a Standard Production Allocation right.

29. CAW shall implement strict water accounting methods approved by the MPWMD General Manager to track CAW production sources to ensure: (a) only water from wells in the Coastal Subareas of the Seaside Basin wells serve the MBSE parcel identified in Condition #1, and (b) no Carmel River Basin water is produced by CAW to serve the subject parcel, consistent with the May 11, 2009 Court Order and May 18, 2009 Water Delivery Agreement. CAW shall submit weekly reporting of daily MBSE-related water production data in the manner and form as prescribed by the District; a required data set is provided as Attachment #3 to these Conditions. A written request to make refinements to the data set in Attachment 3 may be considered by the General Manager at a future date if CAW system physical conditions necessitate a change.

30. Consistent with the May 11, 2009 Court Order, CAW shall submit a written Water Accounting Protocol regarding the sole use of Seaside wells to serve the MBSE project to the District, subject to approval by the MPWMD General Manager, within 90 days of the preparation date shown (see top of page 1) for this Permit to remain valid. The Water Accounting Protocol shall include specific procedures to implement the components itemized in Attachment 4. An extension of time to submit the Water Accounting Protocol may be requested by CAW subject to approval by the MPWMD General Manager.

31. CAW shall provide to the District a copy of any quarterly report to the SWRCB, which may include information about service to the MBSE parcel identified in Condition #1.

32. The Property Owner shall ensure that any use of its on-site wells on the MBSE parcel identified in Condition #1 does not result in more than 149 AFY extractions from the Seaside Basin, when CAW production and on-site well production are combined, with the provision that CAW production to serve the parcel may not exceed 90 AFY. CAW and Property Owner shall coordinate data collection and shall implement a strict water accounting and reporting protocol approved by the MPWMD General Manager, consistent with the required reporting in Condition #29.

ATTACHMENT 1 – Figure of service area for Permitted System

ATTACHMENT 2 – Indemnification Agreement

ATTACHMENT 3 – Water Accounting Data prepared August 2010

ATTACHMENT 4 – Water Accounting Protocol prepared August 2010

U:\staff\word\boardpacket\2010\20100816\PubHrg\18\item18_exh18e.doc