Questions and Answers on Proposed CPUC Decision that Proposes to Disrupt Funding for the

Carmel River Mitigation Program and

Aquifer Storage and Recovery Project

February 2, 2011 Update

What is the Carmel River Mitigation Program?

The Monterey Peninsula Water Management District (MPWMD or District) and California-American Water Company (Cal-Am) have cooperated since 1991 on the State-required Carmel River Mitigation Program to offset the environmental impacts of the Monterey Peninsula’s use of water from the Carmel River. MPWMD Mitigation Program activities include fish rescue and rearing, streamside erosion control and restoration, lagoon management, surface and groundwater monitoring, and water conservation. The Mitigation Program also includes efforts to develop alternative water supplies in order to reduce pumping from the Carmel River. The Mitigation Program has improved river conditions to the benefit of people, fish and wildlife. An overview of the Mitigation Program, including photo presentations, may be found at the District website at:

http://www.mpwmd.dst.ca.us/programs/mitigation_program/mitigation_program.htm and

http://www.mpwmd.dst.ca.us/programs/mitigation_program/about/about.htm.

What is the MPWMD Aquifer Storage and Recovery Project?

The MPWMD Aquifer Storage and Recovery (ASR) Project helps restore the Carmel River by diverting excess winter streamflow into injection-recovery wells in the Seaside Groundwater Basin, then using the water stored in the Seaside Basin as the primary source of supply during dry months (rather than dewatering the river). Such an alternative source of supply is included in the original Mitigation Program description. Since 1998, the District has constructed and operated three specialized injection-recovery wells in the Seaside Groundwater Basin. Cal-Am diverts, treats and transports excess Carmel River water to the District ASR wells, and is integrating the District wells into the Cal-Am water system. The District and Cal-Am have cooperated in ASR efforts for 13 years, and plan to continue this partnership into the future. In Water Year 2010, the ASR Project produced more than 1,100 acre-feet of water, or 8% of Cal-Am’s annual production. The most recent quarterly update on Phase 1 and Phase 2 ASR efforts is found at the District website at:

http://www.mpwmd.dst.ca.us/asd/board/boardpacket/2010/20101018/23/item23.htm.

A monthly presentation on ASR and other water supply efforts is provided to the District Board at its monthly meetings. The most recent slide presentation is on the District website at:

http://www.mpwmd.dst.ca.us/asd/board/boardpacket/2010/20101213/ppt/16_files/frame.htm.

Why Is the Mitigation Program Required?

The California Environmental Quality Act (CEQA) requires that mitigation measures be carried out to address significant adverse impacts to the environment, in this case, impacts caused by Cal-Am’s extraction of water from the Carmel River and the Seaside Groundwater Basins. The impacts were identified in the November 1990 Final Environmental Impact Report (FEIR) on the MPWMD Water Allocation Program; the associated FEIR Mitigation Plan identified the measures to address the impacts. In its Order WR 95-10, the State Water Resources Control Board (SWRCB) imposed an obligation on Cal-Am to continue the Mitigation Program if the District should stop its efforts. The Mitigation Program efforts are a cornerstone of federal oversight regarding the threatened Steelhead fish and California Red-Legged Frog under the federal Endangered Species Act.

What is the MPWMD User Fee?

The MPWMD User Fee is shown as the “Mtry Penin Wtr Mgnt Fee” and totals 8.325% of the “water and other charges” sections on the Cal-Am bill. The Mitigation Program accounts for 7.125% of the bill and the ASR Project accounts for 1.2%. Cal-Am collects the money on its water bills to pay MPWMD for carrying out the Mitigation Program and ASR activities described above. The program costs include MPWMD employees, consultants and contractors; capital costs for major facilities and equipment; facility and project operating and maintenance costs; and overhead (workplace, utilities, insurance, etc.). The MPWMD User Fee reflects each Cal-Am customer’s impact to the river, and thus each customer’s responsibility to help address the environmental damage associated with their water use. Customers who use less water have a lower impact to the river, and pay a lower User Fee.

What Oversight Applies to the MPWMD User Fee?

The MPWMD User Fee first began in 1983 and has been amended over time by action of the MPWMD Board of Directors. Any change to the User Fee is through an Ordinance process that includes at least two public hearings. Each year, MPWMD reviews the specific tasks and budget for the Mitigation Program and ASR Project in public hearings. MPWMD is also required to annually review these programs and determine whether they should be modified to meet legal requirements, assess whether the User Fee amount collected is too high or too low, and make adjustments accordingly. The elected MPWMD Board is directly accountable to local voters and maintains a policy of a balanced budget and fiscal accountability to the public. In its budget deliberations, the MPWMD Board repeatedly has chosen to extend the timing of projects and/or make certain cost reductions due its sensitivity to the impact of any fee on the public.

How Did the CPUC Become Involved with the MPWMD User Fee?

The MPWMD is an independent governmental agency, and is not under the authority of the California Public Utilities Commission (CPUC). In contrast, Cal-Am, as a regulated public utility, must obtain CPUC permission to charge customers rates to build facilities, and operate its system to deliver water, including conservation and other special projects. As part of a “rate case” in May 2008, the Commission expressed interest in better understanding the growing role of MPWMD’s costs in relation to Cal-Am's water bills. In July 2009, the CPUC disallowed the long-standing practice of Cal-Am to collect the MPWMD User Fee and directed that: (a) Cal-Am and MPWMD meet and confer regarding these costs, and (b) Cal-Am submit an application to the CPUC to fund the MPWMD program costs.

The MPWMD User Fee was removed from the Cal-Am bill in July 2009 as a temporary measure pending CPUC approval. In the meantime, Cal-Am and MPWMD signed a contract whereby Cal-Am reimburses MPWMD for monthly Mitigation Program and ASR Project costs.

Cal-Am submitted Application No. 10-01-012 on January 5, 2010, seeking an order authorizing it to collect and remit to MPWMD the District’s User Fee. On January 18, 2010, the CPUC’s watchdog entity, called the Division of Ratepayer Advocates (DRA), protested the application, but only contested the Interest During Construction component. DRA supported Cal-Am’s application in all other respects. On February 18, 2010, MPWMD filed its response, which supported Cal-Am’s application. Following negotiations about the MPWMD Mitigation Program and ASR Project, Cal-Am, MPWMD, and DRA filed a joint motion on May 18, 2010 to approve an All-Party, All-Issue Settlement Agreement. All agreed that the MPWMD Mitigation Program and ASR Project are “non-duplicative, reasonable, and prudent.”

What is the CPUC Proposed Decision and Its Effects?

For each rate case, the CPUC assigns a Commissioner and an Administrative Law Judge (ALJ) to manage the proceedings. Typically, the ALJ writes a Proposed Decision, which is subject to comment. The full Commission decides whether or not to accept the ALJ’s recommendations or modify them in some way. A Commissioner also has the right to prepare an Alternative Proposed Decision if he/she disagrees with the ALJ recommendations. The full Commission rules on each rate case at a public hearing in San Francisco.

A Proposed Decision issued on December 21, 2010 by ALJ Maribeth Bushey would deny Cal-Am’s Application No. 10-01-012 to reinstate the MPWMD User Fee to fund the Mitigation Program and ASR Project. It also would disallow Cal-Am’s recovery of more than $4 million Cal-Am has paid MPWMD in good faith since July 2009, when the MPWMD User Fee was temporarily removed from the Cal-Am bill.

If approved by the CPUC without change, the Proposed Decision would terminate the long-standing funding for MPWMD fish, riparian, lagoon, hydrology, water conservation and water supply programs that have protected our primary source of water supply. MPWMD would have no alternative way to fund the Mitigation Program and ASR Project. In its Order 95-10, the State Water Resources Control Board requires Cal-Am to carry out any part of the original Mitigation Program that is not performed by MPWMD. Importantly, the Proposed Decision makes no provision for Cal-Am to start a new program on its own. Cal-Am does not presently have the staff or expertise to carry out the Mitigation Program, and would have to hire staff and/or consultants to perform the work. Such disruption to the Mitigation Program could potentially cause adverse impacts to threatened species.

What is MPWMD’s Position on the Proposed Decision?

MPWMD believes the Proposed Decision is factually inaccurate, yet provides no opportunity to set the record straight in a CPUC public hearing. The District also believes that the Proposed Decision is legally flawed because it interferes with the authority of a governmental agency to lawfully enact fees for needed services. MPWMD is disappointed that the Proposed Decision rejects the All-Party, All-Issue Settlement Agreement among Cal-Am, MPWMD and the DRA, who agree that the existing User Fee mechanism should continue without change. MPWMD is concerned about interruption of Mitigation Program/ASR activities while Cal-Am and its customers strive to comply with SWRCB Order 95-10, SWRCB Cease and Desist Order, and the federal Endangered Species Act. MPWMD supports Cal-Am’s Application No. 10-01-012, and asks the CPUC Commissioners to modify the Proposed Decision and accept the Settlement Agreement. If the Commission has questions about MPWMD program components, a public hearing should be held so that MPWMD can answer questions, correct misconceptions, and provide facts related to this matter. MPWMD’s formal comments to the CPUC identify the factual and legal issues in detail.

What is Cal-Am’s Position on this Issue?

Cal-Am supports reinstatement of the MPWMD User Fee on the Cal-Am bill. Cal-Am has repeatedly stated that MPWMD is best equipped to carry out the Mitigation Program in a cost-effective manner due to the District staff’s expertise and experience. As noted above, Cal-Am is not currently set up to carry out the Mitigation Program and would have to expend significant time, energy and resources to ramp up. Cal-Am has asked the CPUC to issue an Alternative Proposed Decision to accept the All-Party, All-Issue Settlement Agreement and approve Cal-Am’s application so that the Mitigation Program is not disrupted.

What is the CPUC Division of Ratepayer Advocates’ Position on this Issue?

The CPUC’s Division of Ratepayer Advocates supports Cal-Am’s application to reinstate the MPWMD User Fee on the Cal-Am bill. DRA agreed that the MPWMD Mitigation Program and ASR Project are “non-duplicative, reasonable, and prudent.” DRA has also asked the CPUC to issue an Alternative Proposed Decision to accept the All-Party, All-Issue Settlement Agreement and approve Cal-Am’s application so that the Mitigation Program is not disrupted.

How Can I Get Involved?

Your comments on this issue by letter or e-mail are still pertinent, and should be provided to the CPUC as soon as possible. The District appreciates the support of several local groups and agencies, including the Carmel Valley Association, City of Sand City, and National Marine Fisheries Service, among others. A CPUC hearing date in San Francisco scheduled for January 24, 2011 was continued, and the earliest new hearing date would be February 24, 2011 (to be confirmed). The CPUC contact information is:

CPUC Public Advisor 505 Van Ness Avenue San Francisco, CA 94102 public.advisor@cpuc.ca.gov

President Michael R. Peevey California Public Utilities Commission 505 Van Ness Avenue San Francisco, CA 94102

How Can I Obtain More Information?

Please visit the District website at www.mpwmd.dst.ca.us or call 831/658-5650. The MPWMD website has added a special section on this issue under the “Important Announcements” section of the home page. The “programs” section of the home page provides additional information.

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