RULES AND REGULATIONS REVIEW COMMITTEE
ITEM:		ACTION ITEMS
2.	REVIEW AND DISCUSSION OF MPWMD CONCEPT ORDINANCE -- ADD NEW RULE 23.6 TO ESTABLISH A WATER ENTITLEMENT FOR SAND CITY AND AMENDING RULES 11, 21 AND 23.1 TO REFLECT THE PROCESS FOR ISSUING WATER USE PERMITS
Meeting Date:			November 8, 2007	Budgeted:	N/A
From:			David A. Berger,	Program/	N/A
			General Manager	Line Item No.: N/A
Prepared By:			Same	Cost Estimate:	N/A
General Counsel Review: Yes
CEQA Compliance: MPWMD is a Responsible Agency relying on FEIR certified by City of Sand City Council on January 18, 2005, and Addendum to FEIR adopted by City Council on September 18, 2007, for purposes of considering this draft Concept Ordinance.

SUMMARY: On October 15, 2007 the Board of Directors considered and approved a Water Distribution System (WDS) permit to allow the City of Sand City (City) to convey water from its proposed 300 acre-feet/year (AFY) brackish water desalination plant to the California American Water (CAW) water distribution system. The permit allows CAW to deliver this desalinated water to existing customers within its Monterey Peninsula service area and, subject to certain special conditions, to serve future CAW customer connections within the City limits. The Board also approved a separate-but-related amendment to the CAW WDS permit, which allows the company to use this desalinated water as a new source of supply, and adds a parcel in the City to its authorized service area.

At its October 15 meeting the Board received, but did not directly address or consider, a MPWMD Concept Ordinance prepared by District counsel, which reflects policy choices based on a draft ordinance submitted by City’s legal counsel (Exhibit 2-A). The draft Concept Ordinance proposes to grant the City a legal entitlement to 206 AFY of the water produced by its desalination plant, and would create a District water use permitting process to authorize new CAW connections for parcels within the City to be served by its desalinated entitlement water. Special conditions in both the City and CAW WDS permits, which the Board approved on October 15, anticipate District adoption of such an ordinance. Specifically, the City’s permit authorizes a single connection to the CAW system; and approval of future CAW connections serving parcels located within the City limits is contingent upon creation by the ordinance of a 206 AFY “Desalination Water Entitlement,” provided the plant is completed, properly maintained and reliably able to produce 300 AFY of potable water under the CAW WDS permit. At the October 15 meeting, the Board referred the Concept Ordinance to the Rules and Regulations Review Committee without policy guidance, and directed that the Committee study and submit its recommendation regarding the ordinance to the Board for consideration. The purpose of this agenda item is for the Committee to review the Concept Ordinance submitted by the City, and to address the policy issues described in the Background section of this report.

RECOMMENDATION: District staff recommends that the Rules and Regulations Review Committee:

1. Review the draft Concept Ordinance (Exhibit 2-A);
2. Address each of the policy issues described and analyzed below;
3. Identify any other desired changes to the draft Concept Ordinance for use by District counsel in producing a revised version of the ordinance suitable for first reading consideration; and
4. Decide if it wishes to further review the Ordinance when re-drafted by District counsel, or submit its recommendation to the Board at this meeting, to be reflected in the first reading version of the ordinance.

BACKGROUND: On October 15, 2007 the Board of Directors considered and approved a WDS permit application submitted by the City to enable delivery of potable water from the Sand City Water Supply Project (Project), a desalination plant the City proposes to build and own that would produce 300 AFY of potable water from shallow, brackish-water sources in the Seaside Basin. The Board also considered and approved a separate, but directly related amendment to the existing CAW WDS permit to enable CAW to purchase all of the 300 AFY of desalinated water once the plant is constructed. A separate 15-year lease agreement for CAW to operate and maintain the plant has been executed between CAW and the City. As described in the City’s WDS permit application attached to the October 15 Board staff report, within the next 10 to 20 years, the entire 300 AFY will be used by parcels within the City in accordance with its General Plan. In the meantime, CAW will have access to the desalinated water to help reduce pumping from the Carmel River Basin and comply with State Water Resources Control Board (SWRCB) Order WR 95-10, as well as to serve as a replenishment source to offset Seaside Groundwater Basin pumping reductions scheduled to begin in 14 months under the 2006 Superior Court adjudication decision. The MPWMD served as a Responsible Agency in acting on these permits, which also covers District consideration of the entitlement Concept Ordinance, in compliance with the California Environmental Quality Act (CEQA), and relied on environmental documents certified by the City. While too lengthy to attach, a copy of the staff report submitted for the October 15 Board meeting is available from the District office upon request, and can be found on the District’s website at:

http://www.mpwmd.dst.ca.us/asd/board/boardpacket/2007/20071015/20/item20.htm

Concept Ordinance Policy Issues

MPWMD General Counsel Laredo’s memo of May 29, 2007 (Exhibit 2-B) suggested that an entitlement ordinance be considered in connection with District action on the City and CAW WDS permits, described above. District and City attorneys coordinated on development of the draft Concept Ordinance, which is known as the Sand City Water Supply Project Entitlement Ordinance (Exhibit 2-A). It proposes to create a new MPWMD Rule 23.6, and would amend Rules 11, 21 and 23.1 to authorize issuance of District water use permits from the City’s 206 AFY entitlement of potable CAW water to Sand City parcels for new and intensified uses, based on 300 AFY of production from the City’s desalination plant. (The remaining 94 AFY represents existing CAW use in Sand City.) The draft Concept Ordinance is generally modeled after District Ordinance No. 109, which substantially amended Ordinance 39. Among other substantive changes, Ordinance 109 authorized a portion of the Pebble Beach Company’s legal water entitlement, created by Ordinance 39 in connection with its enabling of the original recycled water project, to be sold to Del Monte Forest residential property owners as a funding source for expansion of the recycled water project.

The major sections of the draft Concept Ordinance include:

A. Findings, Short Title and Purpose

B. Create new Rule 23.6 for Sand City Water Entitlement

C. Amend Rule 21-E re: “Benefited Properties”

D. Amend Rule 23.1 re: Water Use Permit for a “Benefited Property”

E. Amend Rule 11 (Definitions) to be consistent with entitlement, and add new definition for Sand City Desalination Facility

A summary of the key aspects of the draft ordinance include:

A. A Sand City Water Entitlement of 206 AFY is created as a vested property right to the City as long as CAW takes delivery of 300 AFY of potable water from the Desalination Facility. The City may then transfer the vested right to individual properties within the City. MPWMD will track how the 206 AFY “account” is “drawn down” over time.

B. The entitlement begins via a Water Use Permit to the City when the Desalination Facility is fully operational; the entitlement continues through December 2082.

C. The Entitlement is separate and distinct from any other water allocation (Rule 30).

D. Properties within the City must abide by all conservation and water rationing rules.

E. All standard fees associated with MPWMD permits must be paid, as well as all charges imposed by the California Public Utilities Commission (CPUC), CAW or other entities with authority.

F. MPWMD water factors apply to the properties and MPWMD may track water use on these properties.

The content of the draft Concept Ordinance reflects substantive policy choices as presented by City Attorney Heisinger, though some minor text refinements were made by District General Counsel Laredo. In an October 1, 2007 memo Mr. Laredo identifies policy considerations not addressed in the draft Concept Ordinance submitted by the City Attorney (Exhibit 2-C). Since the Board provided no policy guidance to the Committee on the draft Concept Ordinance, and because they are not legal matters, District staff subsequently analyzed these policy issues. The purpose of this staff analysis was to determine differences and similarities between the policy purposes imbedded in Ordinances 39 and 109, and the physical and financial conditions inherent in the Sand City Water Supply Project, in order to suggest which of these policy issues are relevant and appropriate to address in any revision of the draft Concept Ordinance. This analysis is based on a thorough review of Ordinances 39 and 109 that authorized the original Carmel Area Wastewater District/Pebble Beach Community Services District (CAWD/PBCSD) Wastewater Reclamation and Expanded Recycled Water projects, respectively.

Staff found that neither Ordinances 39 nor 109 contain a recital or operative provision stating that their terms and conditions were intended as MPWMD policy precedent for other future water supply projects proposing an entitlement. To the contrary, these two ordinances very narrowly describe the terms and conditions related to the “fiscal sponsors” of the two sub-potable water supply projects, as well as the potable “water entitlement” granted to the Pebble Beach Company and two other Del Monte Forest property owners as a consequence of the projects’ effect in reducing potable water demand. Ordinances 39 and 109 were specifically tailored to the unique financial and physical conditions required to secure fiscal sponsorship of the two projects, and the water entitlement they created constituted the financial incentive needed to attract such fiscal sponsorship. These financial conditions do not exist in connection with the Sand City Water Supply Project, nor is there a need for the District to attract a financial sponsor for that project.

Specifically, Ordinance 39 was adopted to create a legal mechanism for fiscal sponsorship, and a financial guarantee of sufficient revenue required for repayment of District-issued debt financing, for the original reclamation project tertiary treatment and distribution system facilities constructed by CAWD and PBCSD, respectively. The 50 percent potable water entitlement limit in Ordinance 39 was intended to provide an adequate incentive to attract a guaranteed financial resource required for project capital cost debt amortization, and to cover any operations and maintenance (O&M) deficiencies resulting from inadequate revenues of recycled water sales. The primary purposes of Ordinance 109 were to: (1) amend Ordinance 39 to facilitate financing, construction and operation of the expanded reclamation (now called recycled water) project; and (2) allow a portion of Pebble Beach Company’s water entitlement to be sold to third parties within the Del Monte Forest in order to finance the expanded project, given its acknowledgment of the limited availability of public funds for such a purpose. District staff understands that the state awarded the City of Sand City a $2.9 million Prop. 50 grant for its desalination project, and the remainder of funds required to complete the design and construct the facility are available from financial resources controlled by the City and its redevelopment agency. MPWMD has no role in financing or attracting fiscal sponsorship of the project.

Based on the foregoing analysis, staff finds that there are substantial factual dissimilarities between the specific legislative purposes of Ordinances 39 and 109, and the District’s more limited legislative interest in the Sand City Water Supply Project Concept Ordinance. Thus, the rationale for including any of the policy issues raised by Mr. Laredo should be based on the adequacy and clarity of the Concept Ordinance in meeting physical conditions directly related to the District’s role in regulating the Sand City desalination project, and the latter’s effect on the CAW distribution system.

The summary below simplifies Mr. Laredo’s October 1, 2007 memo, and poses a set of policy questions that arise when he compared the draft Concept Ordinance to Ordinance No. 109, or when other unaddressed issues are considered (shown in bold, italicized text). Staff’s conclusions follow, shown in bold text. The designation in brackets in each paragraph below reflects numbering in General Counsel’s October 1 memo (Exhibit 2-C):

1. [Memo IA] Finding #4 of the Concept Ordinance recognizes Sand City’s right to brackish water. However, the Seaside Basin Adjudication judgment states that production from the Aromas Sands Formation may occur “so long as such Production does not cause a Material Injury,” and enables the Watermaster to curtail extractions.

Policy Question: Should language be added to the ordinance to address the situation where production could be limited in order to comply with the Adjudication decision? This is also relevant to questions about long-term system failures (see below).

Staff Conclusion: Include in ordinance; this policy item directly relates to project source of supply that is addressed in the Seaside Basin adjudication, which the District references in its regulation of CAW water resource supply planning and budgeting.

2. [Memo IB] Ordinance 109 requires CAWD/PBCSD to maintain public ownership and to keep the plant operational. Concept Ordinance Finding #6 refers to public ownership but does not require the City to maintain public ownership of the plant, or to keep it operational (see two additional questions related to this issue immediately below).

Policy Question: Should text be added to the ordinance to require the City of Sand City to maintain public ownership of the desalination plant?

Staff Conclusion: Include in ordinance for similar reasons as stated in Item 1 above.

3. [Memo IB] The Ordinance 109 entitlement was granted pursuant to a guaranteed fiscal sponsorship to ensure a viable reclamation project. The Concept Ordinance does not include a requirement that the City guarantees or ensures that the plant is maintained in good operating condition to be able to reliably produce 300 AFY. It is noted that Condition #3 and Special Condition #28 of the approved MPWMD WDS permits for the City and CAW state that the 206 AFY Entitlement is valid only so long as the plant is fully operational and properly maintained to be able to produce 300 AFY of potable supply acceptable to CAW.

Policy Question: Should language be added to the ordinance to require a guaranteed fiscal sponsorship to ensure long-term viability of the plant?

Staff Conclusion: Don’t include in ordinance; Sand City and CAW WDS permit Conditions #3 and #28 requirements are adequate to ensure District’s regulatory function is carried out.

4. [Memo IB] Ordinance No. 109 specifies the definition of a service “interruption” and what happens in a short-term or long-term failure of the reclamation project. It describes how long being off-line is acceptable and the process to address system failure. The Concept Ordinance does not include any information about short-term or longer-term system failure, including the situation where less than 300 AFY is actually able to be produced over the long-term, for whatever reason.

Policy Question: Should text be added to the ordinance to address emergency short-term and long-term system failures, including replacement sources of supply?

Staff Conclusion: Don’t include in ordinance for similar reasons as stated above.

5. [Memo IC] Ordinance 109 allowed 380 AFY out of 800 AFY potential reclamation savings to be used for new water use by the fiscal sponsor, or less than half. Concept Ordinance Finding #10 includes 206 AFY for new uses, which is about two-thirds of the 300 AFY production amount.

Policy Question: Is the ratio of entitlement to plant production acceptable?

Staff Conclusion: Don’t include in ordinance; the 50% ratio in Ordinance 39 was needed to attract fiscal sponsorship of CAWD/PBCSD project; there is no such requirement in this instance as City is SCWSP fiscal sponsor using RDA, Prop. 50 and other financing tools.

6. [Memo ID] Concept Ordinance Finding #11 states that the Water Entitlement is separate and distinct from the City’s Allocation and “won’t affect any future Allocation to the City.”

Policy Suggestion: The Board should confirm this separation.

Staff Conclusion: Include in ordinance; this is a relevant and useful clarification.

7. [Memo IE] Ordinance 109 specified the cost of the Reclamation Project and who is responsible for paying for it. The Concept Ordinance does not include this type of information.

Policy Question: Should text be added to the ordinance to address project costs, cost of water and who is responsible for payment (see specific questions in memo)?

Staff Conclusion: Don’t include in ordinance; see Item 5 rationale above.

8. [Memo IF] Concept Ordinance Finding #18 notes near-term benefits to the Carmel River and Seaside Basins; earlier communications by the City to the SWRCB infer that benefits would be solely for the Carmel River. District technical staff notes that desalinated water would enter the CAW system and quickly be integrated with other sources, similar to one electrical source entering the power grid. Thus, one cannot designate specifically where the desalinated water would travel. However, similar to the District’s Phase 1 Aquifer Storage and Recovery (ASR) Project, indirect benefits occur to the Carmel River and Seaside Coastal Sub areas due to the presence of the desalinated water source, because fewer acre-feet would need to be extracted from wells to meet the same demand. Importantly, MPWMD, CAW and state and federal resource agencies meet quarterly to develop a strategy to address community and environmental needs for the upcoming 3-month period, which includes all CAW production sources.

Policy Question: Should text be added to the ordinance to clarify project benefits to the two primary components of the CAW water resource?

Staff Conclusion: Don’t include in ordinance; clarification is unnecessary, based on facts described immediately above.

9. [Memo IG] Concept Ordinance Finding #18 refers to a “permanent reduction” of 94 AFY, the City’s CAW water consumption in water year 2006. It is unclear how water currently used by the City would be permanently reduced.

Policy Question: Should text for Finding #18 be amended to more accurately describe what the 94 AFY amount represents?

Staff Conclusion: Include in ordinance; this is a factual clarification, and the policy issue is directly related to the basis of the proposed SCWSP water entitlement.

10. [Memo IIA] The purpose of the Concept Ordinance refers to resource benefits but does not spell out potential benefits to the Carmel River and Seaside Basins.

Policy Question: Should text for Section Two, Purpose, be amended to emphasize benefits to the Carmel River and Seaside Basins due to reduced extractions?

Staff Conclusion: Include in ordinance; same as Item 9 rationale.

11. [Memo IIC] The Pebble Beach agreements provided a specific water entitlement in exchange for fiscal sponsorship, and placed limits on the quantity of entitlement that could be sold within a specific time frame. For the Reclamation Project, project costs that exceed CAW’s cost of potable water are paid by the project sponsor. The Concept Ordinance allows the City to convey its entitlement “for valuable consideration” without limitation.

Policy Question: Should text for Section Two, Purpose, be amended to include limits on the timing of the sale of entitlements to Sand City Sites, and relate “valuable consideration” to the project cost?

Staff Conclusion: Don’t include in ordinance; Ordinance 109 financing source was unique to the expanded recycled water project cost.

12. [Memo IIIA] The Concept Ordinance establishes a 75-year life for the entitlement through December 21, 2082. This appears to be inconsistent with a 25-year remaining life of the City’s Redevelopment Plan described in other documents. Long-term fiscal obligations by Sand City over the life of the project are not included.

Policy Question: Should text in Section Three, Rule 23.6, be amended to clarify the project life and financial obligations during that period?

Staff Conclusion: Don’t include in ordinance; there is no policy correlation between RDA “life” and water entitlement duration; Ordinance 39 and 109 potable entitlements have no time limit, incidentally.

EXHIBITS

2-A MPWMD draft Concept Ordinance to facilitate water entitlements to Sand City parcels from desalination plant

2-B Letter from District General Counsel dated May 29, 2007 regarding Sand City application

2-C Memorandum from District General Counsel dated October 1, 2007 regarding policy issues associated with Concept Ordinance

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