Pacific Grove AGENDA REPORT 14A June 20 2012 OCR Document

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CITY OF PACIFIC GROVE300 Forest Avenue, Pacific Grove, California 93950

AGENDA REPORT

TO: Honorable Mayor and Members of the City Council

FROM: Thomas Frutchey, City Manager

MEETING DATE: June 20, 2012

SUBJECT:

Agreement initiating a relationship with Nader Agha and Moss

Landing Commercial Park, LLC. (MLCP) to develop a desalinated

water project able to meet the needs of Pacific Grove and the

Monterey Peninsula

CEQA: This action does not constitute a project as defined by theCalifornia Environmental Quality Act (CEQA) guidelines section

15378.

RECOMMENDATION

1. Receive an update on the agreement to initiate and provide funding to establish a

public/private partner relationship between Nader Agha/Moss Landing Commercial Park, LLC

and the City of Pacific Grove.

2. Decline taking action on the agreement at this time. (If Council disagrees, it has the ability to

take one or more alternative actions, including approving the agreement.)

DISCUSSION

On April 18, 2012, the Council adopted Resolution No. 12-027 directing City staff to prepare an

agreement to define a relationship between Mr. Nader Agha / Desal America and the City

related to development, construction, and operation of a desalinization water supply project

(the Peoples Project) to provide water and benefits to the City and the Monterey Peninsula.

The Council directed that the relationship progress in two stages, with the first stage to be the

execution of an agreement with Mr. Agha establishing the parameters and payment provisions

for the completion of the future agreement related to the development of a water supply

project. The second stage is the future agreement, as contemplated by Resolution No. 12-027,

to provide all details of the partnership and its goals (the Desal America Agreement).

On April 23, California American Water Company (Cal-Am) filed its revised project proposal to

the California Public Utilities Commission (CPUC), Application 12-04-019. In that proposal, Cal-

Am commits to creating water from its north Marina desal project and buying groundwater

recharge from the Monterey Regional Water Pollution Control Agency (PCA) and seasonal

storage water from the Monterey Peninsula Water Management District (MPWMD). Cal-Ams

proposal makes no provision to buy water from the Peoples Desal Project, even though the

project proponents estimate that water from the Peoples Project will be available at

Consent Agenda Item No. 14A

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significantly lower cost. To qualify for the bond funding necessary for the Peoples Project, the

City and Mr. Agha must ensure that the CPUC directs Cal-Am to purchase the water produced

by the Peoples Project for conveyance to the ratepayers. It is problemmatic whether or not

Cal-Am can receive such authorization as a result of its filing in A.12-04-019.

At the May 16, 2012 Council meeting, the Council:1. Received an update on the agreement to initiate and provide funding to establish a

public/private partner relationship between Nader Agha/Moss Landing Commercial

Park, LLC and the City of Pacific Grove and accepted the proposed language, with the

exception of Section 15, Indemnification.

2. Directed staff to negotiate further regarding Section 15, Indemnification, of theAgreement to ensure the City is adequately protected.

3. Directed staff to formally seek through the JPA process additional cities to join the

Agreement, then returning to Council with all results.

During the several weeks since the Councils action, the City and Mr. Aghas team have

completed their negotiations on the Agreement, specifically Section 15, Indemnification, with

the goal of ensuring the City is adequately protected. Mr. Agha has signed the latest version of

the agreement (see Attachment 1). In addition, the Mayor and City Manager have discussed

with other members of the JPA their interest in joining us in this effort. Mayors of the other

five cities have all stated that they are not interested in aligning with this project or either of

the other projects but, instead, are committed to waiting for the results of the outside technical

evaluation.

Other events with impacts on this potential partnership have transpired, as well, including,

among others:

The Water JPA TAC has proceeded with its detailed review of the three proposals. Mr. Agha and Mr. Schroeder indicated to the Water JPA TAC on June 4, and re-iterated

in a letter to the editor of the Herald, on June 12 (Attachment 2) that the proponents of

the Peoploe Desal Project believe members of the TAC have conflicts of interest or are

otherwise biased against the Peoples Desal Project. As a result, they stated that they

are withdrawing the Peoples Project from further consideration by the TAC and will

deal only with the full JPA Board.

The JPA Board approved an RFP for an outside technical evaluation of the proposals.Responses to the RFP are due back on in July.

The JPA Board formally acknowledged that it prefers that the Water ManagementDistrict be the public agency involved in the desal project, not the 6 cities, eitherindividually or as a group.

The City submitted comments to the CPUC Administrative Law Judge, both on our ownand as part of the JPA (Attachment 3).

The CPUC Administrative Law Judge established an extremely aggressive set ofmilestones and time lines, in an effort to ensure that water is available when needed, on

January 1, 2017 (Attachment 4).


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These events, and the additional information that has come to light over the past several

weeks, have been telling.

The key question for the City is whether entering into this partnership with Mr. Agha/Moss

Landing Commercial Park, LLC is likely to be of net benefit or net cost to the citizens of Pacific

Grove. Mr. Agha has made a generous offer to the City. If the Peoples Project is successful,water costs for Pacific Grove ratepayers may be significantly lower than under the other two

proposed projects. In addition, the City would potentially gain revenues that could cover some

of the Citys administrative costs.

However, as stewards of the publics treasury, our primary guiding principle must be minimizing

the risk of harm, by minimizing the likelihood that our actions could put the General Fund at

risk, when there is an alternative action that is less risky.

Peering into the future is always uncertain, but the Citys involvement in the Peoples Project

would appear to have a low likelihood of positive benefit, and a high risk that the costs would

exceed the benefits, for the following seven reasons:

1. The CPUC and other regulatory agencies are not likely to approve Mr. Aghas project (oreither of the other two projects)as currently conceived.

2. Cal-Ams application before the CPUC does not to provide a proper means by which Cal-Am will be authorized to buy water from the Peoples Project to convey to ratepayers.

3. Mr. Agha and the City have markedly different goals, and the proposed partnership is illsuited to assist either party in reaching its goals.

4. Given that a public partner does not appear necessary, the City has nothing of value tooffer Mr. Agha, but does impose significant restrictions on his freedom to act.

5. This project is way beyond the Citys capabilities, and would impose unacceptableopportunity costs on the other responsibilities and opportunities we have in the comingyears.

6. There are significant financial and legal risks of the Citys involvement in this project.7. The resources Mr. Agha is willing and able to commit are not likely to be sufficient to

see this project through to completion. Thus, Mr. Agha will likely need at least one

other partner, which will complicate an already challenged relationship even further.

Each of these is examined below.

1. The CPUC and other regulatory agencies are not likely to approve Mr. Aghas project (oreither of the other two projects) as currently conceived. The proponents of the three projects

have submitted detailed responses to the TACs 50+ questions. The TAC has now finished apreliminary evaluation of those responses. As would be expected with a quite complex project,

involving potential environmental impacts of great significance, and in an area as litigious as

water rights, serious potential issues are evident with all three projects. None of the projects

appears without a major flaw. As the exact nature of the issues clearly vary significantly from

proposal to proposal, it is now becoming reasonable to project that the peninsula may end up

with a project that combines elements of all three proposals

.


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2. Cal-Ams application before the CPUC does not to provide a proper means by which Cal-Am will be authorized to buy water from the Peoples Project to convey to ratepayers. At the

June 6, 2012 Prehearing Scoping Conference, ALJ Weatherford clarified that the hearings and

testimony for Cal-Ams Application 12-04-019 will not address project alternatives, and will

instead focus on whether that proposal is cost-effective or can be achieved in a more cost-

effective manner. As such, it is not likely that evidence pertaining to Mr. Aghas project will bereceived by the CPUC, and it is not likely that the proceeding can authorize Cal-Am to buy water

from that project. This step is essential to ensure that the Peoples Project can be funded, and

for the City to ensure continued compliance with its franchise agreement with Cal-Am.

3. Mr. Agha and the City have markedly different goals, and the proposed partnership is illsuited to assist either party in reaching its goals. Mr. Agha has stated that his two goals for

partnering with the City are to:

1. Sell the City the land at Moss Landing where the plant will be constructed.

2. Contract with the City to design-build the desal plant, based on the technology Mr. Agha

and his partners at Rodi Systems have developed.

There is a high likelihood that, if the City becomes involved in this project, it will not be able to

meet either of Mr. Aghas objectives. As to the land, several factors would tend to make it

preferable for the City to seek to lease the land, not buy it. Even though Mr. Agha has spent

significant sums cleaning his site of contamination, before the City could purchase the property,

a complete assessment of environmental hazards and any remediation costs would need to be

performed, with unambiguous assignment of responsibility. In the event significant

contamination were to be found, any costs to remediate could easily exceed the value of the

underlying property. If the City were to hold an ownership interest, it would likely hold joint

and several liabilities for remediation. This means that the City could bear sole responsibility

for environmental remediation costs in the event its partners were unable to pay.

As to the desal plant design/build, given the requirements ofthe Citys purchasing processes,

and likely bond covenants, we will be issuing a request for proposals (RFP) to identify the

design/build contractor. There is no way to predict at this point whether Rodi Systems would

be the successful proposer. (There would also be at least the appearance of collusion if the City

were to award the design/build contract to Rodi Systems, given that the City would be

perceived as a partner of Mr. Agha and Mr. Agha has interests in Rodi Systems.)

If the CPUCs stated position that a public partner for a desal project in Monterey County is not

necessary is validated over the coming months, Mr. Agha is likely to become increasingly

frustrated at having to adhere to the process requirements that having a public partner such asthe City are likely to impose on him. Having a public partner in that scenario imposes significant

costs but yields no real benefits.

The goals of the Cityto ensure that replacement water is available by January 1, 2017would

appear to be better served by investing the Citys limited resources in other ways, such as

heightened involvement in the Water JPA. If the City continues to be a proponent of just one of

the three competing projects, the City will be violating one of the key tenets of membership on


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the JPA, and will lose its voice, both on the JPA Board but in helping shape the JPAs role as an

intervener with the CPUC.

4. Given that a public partner does not appear necessary, the City has little if anything ofvalue to offer Mr. Agha, but does impose significant restrictions on his freedom to act. There

are already examples of this. Mr. Aghasecured the commitment of a consulting firm toconduct the upcoming CEQA analysis for a relatively low price. The City, however, will have to

issue an RFP and award the contract in full conformance with our purchasing ordinances. That

is likely to both delay the timing of the RFP and increase the overall costs to Mr. Agha. Thus,

when this is combined with the preceding reasons, it would appear that the relationship has a

high likelihood of soon souring, from Mr. Aghas perspective.

5. This project is way beyond the Citys capabilities, and would impose unacceptableopportunity costs on the other responsibilities and opportunities we have in the coming

years. We are not currently in the water business; we have no engineers on staff; our City

Attorney, who is an expert in water, is not able to fully participate, given the perception of a

conflict of interest with his duties as General Counsel to the Water District; given all of the

other projects of importance to the City, and our structural financial deficit, we have no

resources to expend on this project.

The recent Sand City experience is instructive. The San City project was a $12M project

(compared to the approximately $100M Peoples Project. In spite of its small size, the Sand City

project consumed, on average, over 20% of the City Managers time and over $100,000 in legal

costs, without any suits even being filed to stop the project. The project almost had to be shut

down, when Californias bond rating was lowered. The CPUC rejected Cal-Ams proposal to

undertake operational costs for the Sand City project, and has not finalized its review of that

effort.

Even though Mr. Agha has committed to pay for the staff time involved, there is no way to

make up for the time lost on other projects. There are numerous high-priority projects

including the recently requested fire analysis, needed improvements in Police cost-

effectiveness, continued progress on resolving the retirement benefits issue, among othersas

well as overall management of the City, that will be sacrificed if this project proceeds. A

significant portion of the Councils time would also need to be dedicated to this effort.

5. There are significant financial and legal risks of the Citys involvement in this project.

One of the primary underlying principles required by the Council in the formation of therelationship with Mr. Agha is that the Citys General Fund and overall fiscal health not be placed

at any risk. Two specific areas of interest were negotiated over the past several weeks to

ensure consistency with that principle:

Assurance that the $600,000 Mr. Agha is committing to the development of the PeopleProjects EIR, permit applications, and other efforts will be available when needed; and


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Protection of the City in the event of lawsuits, regulatory requirements of the CPUC,Coastal Commission, or other permitting bodies, or any other unintended sources of

expenses resulting from the Citys participation in the Project.

However, in spite of this, the attorney for PARSAC, our risk management consortium, has noted

that even the most comprehensive assurance that Mr. Agha intends to indemnify and defendthe City from risk includes the possible risk that his resources will not be sufficient or available

to meet this objective. The City may not avoid joint and several liability to third parties or the

public at large. The City, alone, will be responsible for these expenses if insufficient resources

exist to fund the indemnity provisions. Further, as seen in the three-party agreements between

Cal-Am, the Marina Coast Water District, and the Monterey County Water Resources Agency

for the now-defunct Regional Desal/Coastal Water Project, an iron clad set of indemnity and

reimbursement agreements are of no avail when one party contends that the contract itself is

void.

Paragraph 16 of the draft Agreement proposes that the Parties to the agreement agree not tosue each other. That provision, alone, calls into question the enforceability of any of the

agreements payment and indemnification provisions.

6. The resources Mr. Agha is willing and able to commit are not likely to be sufficient to see

this project through to completion. Thus, Mr. Agha will likely need another partner, which

will complicate an already challenged relationship even further. The attorneys we

interviewed to represent us at the CPUC indicated that, even without litigation, administrative

costs for this project will be considerable. They believe that the environmental review process

may cost from $750,000 to $1,000,000, or more. They also believe that legal and technical

expenses for the CPUC processes may exceed $1,000,000 due to the large number of

participants, and the anticipated adversarial positions of the parties. Thus, significantly greaterventure capital will be needed before the due diligence the City must undertake as a public

agency could be completed.

CONCLUSION

The Council subcommittee has consistently championed this project and the partnership. As

City Manager, however, my perspective, and the factors that I must consider, are inherently

different. In general, as the chief executive officer of the City, a city manager is required to

view the Citys affairs as societal and economic problems to be solved. The City works best

when it shepherds its resources in order to be most cost-effective. The City can make the best

use of its limited resources by addressing those problems that it can solve. The Citys powerand influence is based on the discretionary resources the City has at its disposal.

As policy-makers, Councilmembers can have a very different perspective. A Councilmembers

perspective can tend to view the Citys affairs as interests to be reconciled so that agreement

can be reached on how to move forward. From this perspective, the City works best when it

listens to the various groups demanding City actions to solve their problems. The Citys power


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and influence is based on the citizens whose needs have been met and believe that the City can

do so again in the future.

On most issues, these two perspectives can be reconciled. In this case, we have not found a

way to to do so. I fully respect the subcommittees perspective and commitment. However, as

City Manager, I cannot recommend that the City become a partner in this project; the downsiderisks far outweigh the possible benefits that cannot be achieved by other means. It is my

professional opinion that the Citys goals can be better achieved and our citizens better served

by not proceeding with this agreement at this time, but instead, continuing as a full

participating partner in the Water JPA.

FISCAL IMPACT

Mr. Agha has committed, on behalf ofthe Peoples Project, to pay all City costs involved, prior

to the activity causing the expense. The intent is that no activity will be undertaken that

requires a financial contribution from the City before overall Project financing is obtained. As

noted above, indemnity and reimbursement agreements cannot ensure that avoid all risks to

the City will be avoided. Accordingly, it must be assumed that the City will accept a significant

risk to its fiscal resources if it enters into the proposed agreement.

ATTACHMENTS

1. Draft Agreement, signed by Mr. Agha, dated June 1, 20122. Letter to Editor, Monterey County Herald, June 12, 20123. City Comments to CPUC Administrative Law Judge, June 4, 20124. Schedule of Proceedings Proposed by CPUC Administrative Law Judge, June 6, 2012

RESPECTFULLY SUBMITTED:

_____________________________

Thomas Frutchey

City Manager


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Consent Agenda Item No. 14AAttachment 1

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Monterey County HeraldLetter to the EditorJune 12, 2012:

Agha opposes Narigi on panel

I am concerned that the Technical Advisory Committee of the mayors joint powers agency is too little

technical and too much political.

It is one thing to have George Riley on it, a student of water issues and stimulant for addressing

important policy questions. But it is quite another to have John Narigi on it, the political kingpin for the

hospitality industry. He is not a water expert. He has been making biased bureaucratic comments about

my Peoples desalination project and our list of questions that was answered with the help of the best

engineers and consultants.

The Peoples Project has received a great evaluation from the independent consultant with the ultima te

findings of no fatal flaws. Narigis history on water is essentially political and he has acknowledged his

preference for the Cal Am proposal in public. He is also known to be closely connected to the DeepWater Desal. How do you expect an objective evaluation of the desal proposals with his inexperience

and inability to make an educated independent evaluation? His project preferences are widely known.

I am concerned that the Peoples Project will not get a fair hearing. I believe he should recuse himself

because in our opinion he does not stand for the best interest of the ratepayers. This is clear due to his

bias toward Cal Am, which made a deal to reduce his groups water rate and push the burden towards

ratepayers.

Nader Agha

Pacific Grove

Consent Agenda Item No. 14BAttachment 2

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City of Pacific Grove Prehearing Conference Statement

A.12-04-019

BEFORE THE PUBLIC UTILITIES COMMISSION

OF THE STATE OF CALIFORNIA

Application of California-American ) Application 12-04-019

Water Company (U210W) for Approval ) (Filed April 23, 2012)of the Monterey Peninsula Water Supply )

Project and Authorization to Recover )

All Present and Future Costs in Rates )____________________________________)

PREHEARING CONFERENCE STATEMENT

OF THE CITY OF PACIFIC GROVE

Thomas FrutcheyCity Manager

City of Pacific Grove

300 Forest AvenuePacific Grove, CA 93950

Telephone: (831) 648-3181

Facsimile: (831) 657-9361

Email: [email protected]

CITY OF PACIFIC GROVE

June 4, 2012


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City of Pacific Grove Prehearing Conference Statement

A.12-04-019

BEFORE THE PUBLIC UTILITIES COMMISSION

OF THE STATE OF CALIFORNIA

Application of California-American ) Application 12-04-019

Water Company (U210W) for Approval ) (Filed April 23, 2012)of the Monterey Peninsula Water Supply )

Project and Authorization to Recover )

All Present and Future Costs in Rates )____________________________________)

PREHEARING CONFERENCE STATEMENT

OF THE CITY OF PACIFIC GROVE

Introduction

The City of Pacific Grove (City) hereby submits its Prehearing Conference Statement for

the scheduled June 6, 2012 Prehearing Conference in accord with Administrative Law Judge

(ALJ) Weatherfords Ruling of May 11, 2012, and Rule 7.2 of the Rules of Practice and

Procedure (Rules) of the California Public Utilities Commission (Commission).

Issues to Define the Scope of the Hearing

The City believes there are a number of issues worthy of in-depth analysis. However,

rather than repeat issues already identified by other interveners, including the Monterey

Peninsula Regional Water Authority (MPRWA), of which the City is a member, the City

identifies here only the following additional issues it requests be addressed in the hearing:

Development of a desalination projectas one major component of the Projectappears

necessary. In order to best serve the ratepayers, and maximize the chances that the replacement

water is available on time, the City believes that the principal competitive project proposals must


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all be vetted using four main criteria: technical feasibility; on-time deliverability; cost to

ratepayers; and governance.

Given the likely costs of the water generated by one or more of the three major

components of the proposed project will represent a significant increase over current costs and

require a significant increase in rates, small projects that were previously rejected should be re-

examined, as they may now be cost-competitive. Examination of small projects should not

provide a basis to delay approval or delivery of the proposed project, but may offer opportunities

to reduce its scale or cost provided those alternates are achievable in a timely manner. The City

is prepared to discuss one or more small project opportunities that appear promising.

The lack of any role for representatives of local ratepayers in governance is still a matter

of concern. Such a role can be accomplished through either a public partner or through the

ongoing decision-making structure. A public partner may insulate the risk of operational

disruptions and public health impacts, may ensure the lowest cost financing and thereby

minimize rate impacts, and may best address concerns over growth inducement. Involving the

cities in ongoing Project decision-making ensures that the ratepayers interests are represented,

and such interests adequately balance the interests of investors. We believe that such public

involvement in governance must include binding applicationas to the projects design, financing,

construction, and operation.

The Project faces a number of actual and potential legal hurdles that create risk of

litigation and delay. The Commission is uniquely able to design a review and approval process


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that enables collaboration and compromise among the various parties to address outstanding

issues, develop mutually acceptable solutions, and minimize litigation risk.

Workshop

In view of the complexities of the issues and need for timely resolution, the City supports

holding a workshop, preferably in Monterey County, which will tend to increase participation of

local interested parties and their acceptance of developed solutions.

Settlement

The City is willing to participate in settlement discussions, with or without mediation,

and is committed to ensuring they are productive.

Schedule

The proposed schedule does not identify the timing of environmental review. A

completed environmental review, including public comments and responses, is critical to

formulation of mitigation and alternatives, which may constrain the selection and costs of the

options available for evaluation in the formal proceedings. In order to ensure that environmental

considerations are incorporated into the formal proceedings, a final environmental document

should be published before testimony and evidentiary hearings.

Conclusion

The City looks forward to working with all interested parties to achieve the best and most

timely solution for the Monterey Peninsula.


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Page 4

Dated: June 4, 2012 Respectfully submitted,

/s/Thomas Frutchey

Thomas Frutchey

City ManagerCity of Pacific Grove

300 Forest Avenue

Pacific Grove, CA 93950


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Pacific Grove AGENDA REPORT 14A June 20 2012 OCR Document

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