WATER DEMAND COMMITTEE
DISCUSSION ITEM
2.	DISCUSS PROPOSALS – WATER FOR AFFORDABLE/WORKFORCE HOUSING
Meeting Date:		October 31, 2019	Budgeted:	N/A
From:		David J. Stoldt	Program/
		General Manager	Line Item No.:	N/A
Prepared By:		David J. Stoldt	Cost Estimate:	N/A
General Counsel Approval: N/A
Committee Recommendation: N/A
CEQA Compliance: Action does not constitute a project as defined by the California Environmental Quality Act Guidelines section 15378.

SUMMARY:  At its August 2019 meeting, the Board discussed actions it might take to make available water to the jurisdictions for their housing needs during the remaining years the Cease and Desist Order remains in effect, presently estimated at two to three years. Staff was instructed to bring detailed proposals to the Water Demand Committee and then to bring that Committee’s recommendations to the Technical Advisory Committee (TAC).

The concepts presented at that meeting included the following:

• Create new Allocation from accumulated conservation savings (e.g. District Ordinance 87 for CHOMP in 1997)

• Reclaim recently expired Water Use Credits

• Seek voluntary forfeiture of existing Water Use Credits

• Ease transfers between Non-Residential and Residential Water Use Credit holders

• Consider allowing financial incentives for Water Use Credit transfers

• Develop a conservation offset program

• Allow Entitlements to be designated for a general place of use, freeing up potable supply elsewhere

As a result of Ordinance 168, the District currently has nine acre-feet (AF) in the District Reserve that could be allocated at the discretion of the District Board. The concepts above would result in additional water to the District Reserve, primarily targeted to housing. Before discussing the concepts in greater detail, there are a few key policy questions that should be answered:

1. How much water is needed in the next two to three year window for housing?

2. The District should not make land use decisions, so how do we allocate water to Jurisdictions for a stated purpose, without restricting a Jurisdiction’s right to make its own decisions?

3. How do we address the “bang-for-the-buck” issue of water for 100% Affordable Housing, versus market-rate housing with a 20% or 25% affordable set-aside, versus moderate income housing, versus need for simply more housing in general?

4. If the District adopts rules to facilitate housing, the same rules may also facilitate additional Non-Residential development in some instances (as discussed in the descriptions below) – is that a desired outcome?

5. What, if any, might be the response of the State Water Resources Control Board as it relates to Condition 2 of the CDO?

The Committee should discuss these key questions.

RECOMMENDATION: Provide direction to staff on which proposals to pursue further and to convene a TAC meeting to discuss proposals and secure estimates of need.

DISCUSSION: Below, each proposal is discussed in greater detail and background provided.

1) Create new Allocation from accumulated conservation savings: Through District programs and Cal-Am rate structures the community has achieved approximately 3,000 AF of annual reductions in water demand since the CDO was enacted in 2009. The Board has the option to simply recognize these savings, in part, as a Public Water Credit allocable to the Jurisdictions for their use. There is precedent for this approach in District Ordinance 87 in 1997 (attached as Exhibit 2-A).

In this proposal, the District would convene the TAC, request statements of interest regarding the Jurisdictions’ perceived water Allocation needs for the next 2 to 3 years, and an indication of how they may choose to use the water, if and when developed by the District. The District would develop findings that there is urgent need for the Allocation, the conservation savings are significant, the proposed Allocation is a minimal portion of the savings, that reallocation of the savings will not significantly deplete water resources or exceed legal limits on water production, and develop CEQA findings that support the determination.

2) Reclaim recently expired water credits: Water Use Credits documented for property owners who have made retrofits or other forms of permanent abandonment of Cal-Am water usage inure to the property, yet expire in 10 years. The District could slightly modify its Rules and Regulations to state that upon expiration the District may place the credits in the District Reserve for reallocation to the Jurisdictions within one to two years. To assist with the CEQA analysis, the District could consider permanent retirement of 15% of the credits to benefit environmental flows on the Carmel River. As an example, at the end of 2019, 13.47 AF of credit will expire from 146 different properties. In 2020, it is only 4.132 AF over 62 properties. This approach, in effect, says a homeowner or business owner did not utilize its right to use a credit for previously utilized water, so the District will do so.

3) Seek voluntary forfeiture of existing Water Use Credits: There are 5,092 documented Water Use Credits comprising 224.4 AF outstanding within the District that expire between 2020 and 2029. The average credit is just under 0.045 AF. Most will go unused. This concept envisions a mass mailing to credit holders with a request that they waive or forego their rights to the credit. The positively responding credits would be added to the District Reserve for reallocation.

4) Ease transfers between Non-Residential and Residential Water Use Credit holders: Presently District Rule 28 is relatively restrictive regarding transferring a Water Use Credit. The current rule allows:

· A transfer from one property to another for Commercial and Industrial users between each other, but not from Non-Residential users to Residential or vice versa.

· Non-Residential Water Use Credits may be transferred back into a Jurisdictional allocation (However, there was litigation that has slowed this process, see below.)

· Residential credits cannot be transferred.

· Each land use Jurisdiction shall act as the lead agency under CEQA for such transfers.

· Transfers may only occur within a single Jurisdiction.

· Transfers must have the approval of the local Jurisdiction.

· The District shall not approve any transfer where money or other valuable consideration has been given (and violation is a misdemeanor).

The District was sued twice in 2006 on Water Use Credit transfers in Seaside and Monterey (2.166 AF and 0.789 AF, respectively), and those amounts were even reduced by 15% for a set-aside for environmental flows on the Carmel River, as a mitigation. The District initially prevailed in Superior Court, but lost on appeal. Basically, the Court of Appeals found that that the California Environmental Quality Act (CEQA) findings must show that the cumulative impact of the transfer and future other transfers must not affect the environment. As a result, the District put the onus of CEQA review on the local jurisdictions.

The proposal would eliminate most of the restrictions cited above, allowing more free exchange. At this time, we may not be ready to allow a price-based transfer to happen, but it should be discussed. The District would need to modify its Rules & Regulations to take back responsibility for the CEQA findings and study the cumulative impacts, perhaps finding the likelihood of 5,092 Water Use Credit holders (at 0.045 AF per individual average credit, see above) joining together is minimal and the likely cumulative impacts have been mitigated. The District would also need to make a decision as to whether it would allow Residential and Non-Residential property-to-property transactions, property-to-Jurisdiction transactions, or instead should have all Water Use Credit transfers return back to the District Reserve.

Of note is that this approach could also facilitate commercial development through the use of transfers.

5) Consider allowing financial incentives for Water Use Credit transfers: See above. It is not staff’s recommendation to pursue this proposal at this time. However, the District’s Entitlement ordinances have created local markets for access to water at $240,000 to $250,000 per AF, hence it not a stretch to consider allowing arm’s-length negotiated sale transactions of Water Use Credits.

6) Develop a conservation offset program: In 2018, the Water Demand Committee directed staff to begin to determine basic provisions of a water conservation offset program. An offset program would allow a developer of a proposed project in a Jurisdiction where an Allocation of water is unavailable to invest in conservation savings elsewhere and use the credit created to “offset” the required water for the proposed development. At the meeting, the Committee stated its preference for a program where actual savings will occur, rather than paying into a mitigation bank to help pay for programs by the District to occur sometime in the future.

Several communities have water conservation offset policies. In fact, the District has envisioned such a program in its Rule 24. Section E of Rule 24 covers “Special Circumstances” and subsection 6.k. states what is expected of a developer if a project fails to stay under its calculated Water Use Capacity limit: “Water use will be reviewed annually after occupancy. If actual water use exceeds the preliminary Water Use Capacity estimate during any annual review, the District will debit the Jurisdiction’s Allocation for the difference. At the end of the monitoring period, if the average annual water use exceeds the preliminary Water Use Capacity estimate, the District will determine whether the Jurisdiction shall transfer some of its Allocation to the Project, or whether the Applicant shall pay the cost of District-approved water conservation projects within the District or on the Project Site to establish Water Use Credits to offset the increased increment of water needed by the Project.” (emphasis added) To date, the District has not formalized a process for how it would approve such projects.

 It is not staff’s recommendation to pursue this proposal at this time.

7) Allow Entitlements to be designated for a general place of use, freeing up Potable supply elsewhere: Presently, all District approved Entitlement programs allow locally created water supplies to offset and “free-up” Cal-Am water to be used on new development. Examples include the Pebble Beach Reclamation Project, Sand City desalination, and the Pacific Grove Local Water Project, among others. This proposal would be to allow the District to separate the water entitlement from a particular Parcel within the Entitlement’s place of use and allow the District to simply designate that the purchased Entitlement is being used to meet general customer demand within the designated place of use, with no Parcel designation. The District would also declare a like amount of water is therefore “freed-up” within the Cal-Am system and could be made available to a Jurisdiction.

This approach would likely require a developer to become a buyer of an Entitlement, which may not be economically viable for Affordable Housing, but could foster market rate housing proposals and/or downtown revitalization projects.

EXHIBIT

2-A Ordinance No. 87 (1997)

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