a 12-04-01 direct testimony of david j stoldt mpwmd.pdf

7/28/2019 A 12-04-01 Direct Testimony of David J Stoldt MPWMD.pdf

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DIRECTTESTIMONY OF DAVIDJ .STOLDTA.12-04-019

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WD-5

BEFORE THE PUBLIC UTIL ITIES COMMISSION

OF THE STATE OF CALIFORNIA

In the Matter of the Application of California- Application No. 12-04-019American Water Company (U210W) for a (Filed April 23, 2013)Certificate of Public Convenience andNecessity to Construct and Operate itsMonterey Water Supply Project to Resolve theLong-Term Water Supply Deficit in itsMonterey District and to Recover All PresentAnd Future Costs in connection Therewith inRates

DIRECT TESTIMONY OF DAVID J . STOLDT

De LAY & LAREDODavid C. Laredo, CSBN 66532Heidi A. Quinn, CSBN 180880Alex J. Lorca, CSBN 266444606 Forest AvenuePacific Grove, CA 93950-4221Telephone: (831) 646-1502Facsimile: (831) 646-0377Email: [email protected]

[email protected]

[email protected]

Attorneys forMONTEREY PENINSULA WATERMANAGEMENT DISTRICT

February 22, 2013


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TABLE OF CONTENTS

Page

I. INTRODUCTION ............................................................................................. 1

II. POSITION OF MPWMD ON THE APPLICATION A.12-04-019 ................. 4

III. DISTRICT POSITION ON WATER DEMAND AND PROJECT SIZING ... 7

IV. DISTRICT POSITION ON GROUNDWATER REPLENISHMENT ........... 11

V. DISCUSSION OF KEY FINANCIAL ISSUES ............................................ 13

VI. DISCUSSION OF GOVERNANCE ISSUES ................................................ 20

VII. THE DISTRICTS ALTERNATIVE BACK-UP PROJECT ...................... 21

VIII. OTHER MISCELLANEOUS AREAS OF DISTRICT INTEREST

OR CONCERN ............................................................................................... 27

IX. SEASIDE BASIN OPERATIONS .................................................................. 28

X. CITY OF PACIFIC GROVE SMALL WATER PROJECTS PROPOSAL ... 29


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BEFORE THE PUBLIC UTIL ITIES COMMISSION

OF THE STATE OF CALIFORNIA

In the Matter of the Application of California- Application No. 12-04-019American Water Company (U210W) for a (Filed April 23, 2013)Certificate of Public Convenience andNecessity to Construct and Operate itsMonterey Water Supply Project to Resolve theLong-Term Water Supply Deficit in itsMonterey District and to Recover All PresentAnd Future Costs in connection Therewith inRates

DIRECT TESTIMONY OF DAVID J . STOLDT

I. INTRODUCTION

Q1. What is your name and address?

A1. My name is David Stoldt and my address is 5 Harris Court, Building G, Monterey, CA

93940.

Q2. By whom are you employed and in what capacity?

A2. I am employed by the Monterey Peninsula Water Management District (MPWMD or

the District) as its General Manager.

Q3. Please briefly describe your current responsibilities.

A3. I am responsible for all activities of the District, including oversight of the operations in

administration and finance, water resources, planning and engineering, and water

conservation and demand management.

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Q4. Can you briefly describe your educational background?

A4. I hold an MBA and Certificate of Public Management from Stanford University, a MS in

Energy and Resources from University of California, Berkeley, and a BS in Civil

Engineering (Environmental and Hydrosystems) from the University of Illinois. I served

as board member of the UofI Civil and Environmental Engineering Alumni Association

from 2004-2008.

Q5. Do you have professional experience with large scale capital projects, such as water

supply projects?

A5. I have extensive experience in developing cash flow scenarios, structuring complex

capital financings, and advising about cost allocation and inter-agency issues primarily

for public entities such as water, wastewater, public power, and solid waste agencies. I

also have experience in private sector financial management, as well as public-private

partnerships and privatization.

I was investment banker and financial advisor to public agencies in California and

the west coast for 15 years through 2002. My work included 41 senior managed bond

issues totaling over $3 billion and advisory work for numerous entities. In the local

region, I have served as underwriter for the $34 million Monterey Peninsula Water

Management District (MPWMD) wastewater reclamation project financing, the $50

million Monterey County Water Resources Agency reclamation and distribution projects

for the Salinas Valley Reclamation Project and the Castroville Seawater Intrusion Project,

and $13 million Monterey County Regional Waste Management Authority integrated

waste management project. In the late 1990s I provided advisory services to MPWMD

related to the proposed Carmel River Dam and long-term financial and capital facilities

planning to Pajaro Valley Water Management Agency.


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Following a move to the East Coast, from 2000 through 2011 I served as a

director or committee member for six governmental committees dealing with land

acquisition, building design, construction, master planning, EIR review and comment,

conservation easements, negotiating funding agreements, green energy procurement,

and management of architects, engineers, and developers. In 2006, I successfully guided

Senate Bill 2070 through the Massachusetts legislature, which provided creative debt

structuring alternatives for a new capital project, outside the traditional General Laws. I

have also served as funder, CFO, or CEO of several early-stage private companies.

Prior to investment banking, I worked four years at a major California investor-

owned electric utility and was involved in power sales contract negotiations, regulatory

issues, and demand forecasting. On several occasions I was called on to explore the

differences in ratepayer impacts of capital finance by regulated utilities compared to

public debt finance.

Q5. What is the role of MPWMD?

A5. The California Legislature created MPWMD in 1977 for the purposes of conserving and

augmenting the supplies by integrated management of ground and surface water supplies,

for control and conservation of storm and wastewater, and for the promotion of the reuse

and reclamation of water. (Statutes 1977, ch. 527, section2, Deerings Water Uncod.

Acts (2008 Suppl.) Acts 5065, p.98-99 (District Law).)

MPWMD is governed by a seven-member Board of Directors, five of whom are

elected by voter divisions within the District. The other two Directors include a

Supervisor appointed by the County Board of Supervisors and a Mayor appointed by the

City Selection Committee of Monterey County. The Districts boundaries roughly align

with those of Cal-Ams Monterey County District, exclusive of Toro, Ambler Park, and

Chualar.


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The District has performed many functions since inception including institution of

the Monterey Peninsulas first stand-by rationing plan in 1981, establishment of limits to

Cal-Am production from the Carmel River and subsequent allocation of water to

jurisdictions in 1990. The 1990 Water Allocation Program was subject to an

Environmental Impact Report as required by the California Environmental Quality Act,

the certification of which included mitigation measures that became the Districts

Mitigation Program. In 1995, the State Water Resources Control Board (SWRCB)

issued Order 95-10, which among other things determined Cal-Ams legal right to water

from the Carmel River. Order 95-10 also concluded that the Districts Mitigation

Program was effective and vital to counteracting Cal-Ams overdrafting of the river and

determined that if the District should at some point in the future cease its Mitigation

Program, Cal-Am would have to perform its duties.

The District also provided the leadership in developing certain water supplies

including the research and development into the expansion of the Peralta Well in the

Seaside Groundwater Basin (Seaside Basin) in the late 1980s, a desalination facility

rejected by the voters in 1993, the Los Padres Dam rejected by the voters in 1995, and the

research, development, and construction of Aquifer Storage and Recovery (ASR) in the

2000s. The District is a co-funding partner with the Monterey Regional Water Pollution

Control Agency (MRWPCA) in the development of the Groundwater Replenishment

project (GWR) subject to the Memorandum between Cal-Am, MRWPCA, and the

District dated April 20, 2012 and included in Cal-Ams original application A.12-04-019

as Appendix A there to.

I I. POSITION OF MPWMD ON THE APPLICATION A.12-04-019

Q6. Why is the District entering testimony in this proceeding?

A6. To quote Jeffrey Linam, Cal-Am Director of Finance from page 10 of his initial

testimony April 23, 2012, the Monterey Peninsula Water Supply Project will be the


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single largest capital project in the history of California American Water. As such,

given the Districts 36 years of oversight of the water resources of the Monterey

Peninsula, we seek to ensure transparency of governance, reduced cost to the ratepayers,

coordinated operations and reporting, as well as expeditious progress to a water supply

solution.

Q7. Does the District have a position on Cal-Ams application A.12-04-019

A7. Yes. The District Board has adopted specific positions with respect to several aspects of

the application. The District prefers public ownership of water supply for two principal

reasons: (1) decisions about the development, allocation, and operation of water supply in

a water scarce region such as the Monterey Peninsula should be made with public input

and engagement, and public ownership provides the greatest transparency, and (2) public

financing significantly reduces the capital cost recovery from ratepayers. However, the

District recognizes that the proposed desalination facility under consideration in A.12-04-

019 is to be built, owned, and operated privately by Cal-Am. As such, the District

encourages the Commission to endeavor to achieve the same goals of transparency of

governance and reduced cost to the ratepayers.

The District also believes it is of paramount importance that the Commission give

equal consideration to the publicly owned project components in this application GWR,

ASR, and Pacific Groves Small Projects and ensure that they remain a viable part of

the overall Monterey Peninsula water supply solution.

Q8. You indicated the District has adopted specific positions on the application. Please

elaborate.

A8. Section 1002(a)(1) of the California Public Utilities Code states that when considering

the granting of a CPCN, the Commission, as a basis for granting any certificate, shall

give consideration to Community Values. On February 12, 2013 the District adopted a


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position that is consistent with the positions adopted on January 31, 2013 by the

Monterey Peninsula Regional Water Authority (Authority), an Authority comprised of

the six mayors representing the six cities of the Monterey Peninsula, and adopted on

February 12, 2013 by the Monterey County Board of Supervisors. Hence, this position

has wide community support. The Districts position is as follows:

The District offers its conditional support for the Cal-Am application subject to

eight specific conditions.

Q9. What are the eight conditions?

A9. If Cal-Am makes certain modifications to its proposal, it would earn the support of the

District and other community leaders. The District requests that the Commission direct

Cal-Am to meet these conditions in its Decision to issue a CPCN. The conditions are as

follows:

1) Cal-Am should accept, or the Commission should direct Cal-Am to accept, acontribution of public funds in order to reduce the capital financing cost to the

ratepayer;

2) Cal-Am must agree, upon mutually acceptable terms, to form a GovernanceCommittee to provide publicly-accountable oversight of the project;

3) Cal-Am must diligently pursue lower electricity rates in order to reduce operatingcosts and their effect on rates;

4) Surcharge 2 should be employed in a manner that reduces the risk to the ratepayershould the investment become stranded in the event the project does not go

forward. For example, the Surcharge could be utilized for tangible assets that


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would be required irrespective of the desalination solution or only expended after

key permits have been issued. If early costs do become stranded, the Commission

should subject them to its policies related to stranded costs.

5) Cal-Am must promptly address concerns related to the proposed intake slantwells, including addressing Salinas Valley Water Coalition studies performed by

hydrogeologist Tim Durbin, advance the test wells and data collection

expeditiously, advance the timeline for permitting efforts, and clarify immediately

whether slant wells are subject to federal NEPA review.

6) Concurrent with the advancement of slant wells, Cal-Am should fully develop anext best contingency plan for source water that does not involve Salinas Valley

Groundwater Basin sources.

7) Cal-Am must provide evidence that it can obtain State revolving fund (SRF)loans from the State of California Department of Water Resources, or demonstrate

that it is willing to partner with a public agency therefore. and

8) Cal-Am must better address questions about coastal erosion, sea level rise, andseismic risks related to slant wells in the coastal dune zone, especially

construction in the swash zone.

Several of these conditions are addressed in greater detail in later sections of this

testimony.

I II : DISTRICT POSITION ON WATER DEMAND AND PROJ ECT SIZING

Q10. Did the District review the revised water demand and desalination project sizing as

presented by Cal-Am in its January 11, 2013 Supplemental Testimony?


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A10. Yes. On page 4 of his supplemental testimony, Cal-Ams Richard Svindland indicated

that Cal-Am was increasing the size of the proposed desalination facilities to incorporate

replenishment of the Seaside Basin, as well as potential demand they had previously not

included in the project sizing. These include build-out of the Pebble Beach project the

EIR for which was certified by the County last summer, the potential bounce back in

tourism resulting from economic recovery and utilizing existing visitor-serving capacity,

and legal lots of record. These additions represent an increase of 46 acre-feet per year

(AFY) compared to the April 23, 2012 initial Cal-Am filing and are shown in the table

below:

Estimated Demand Mid Range (AFY) 15,296

5yr Average (AFY) 13,290

Pebble Beach (AFY ) 325

Tourism Bounce Back (AFY) 500

Lots of Record (AFY ) 1,181

The resulting revised desalination facility size is 6,252 AF with GWR, or 9,752 without

GWR. The increase in size as compared to the April 23, 2012 initial application is

attributable the 46 AFY increase in demand plus the 700 AFY reduction in available legal

supply due to Seaside Basin recharge Cal-Am has agreed to provide to the Watermaster

in the form of in-lieu recharge for the next 25 years. The District has examined the three

component additions to the 5-year average and has determined each to be reasonable.

With respect to the Pebble Beach Company component, the Districts December

31, 2012 Water Entitlement Report indicates that there remain 321.581 AFY in Pebble

Beach Water Entitlements, plus there is likely to be a portion of the 58.419 of water

permits issued as yet unconnected to the Cal-Am system, therefore we find the 325 AFY

value reasonable. The report may be found at:


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http://mpwmd.net/asd/board/boardpacket/2013/20130130/24/item24_exh24b.htm The

tourism bounce-back number, also referred to as economic recovery, was also reviewed

by the District and determined reasonable by its Board. For example, the difference

between water use in the commercial sector in the year 2000, when visitor-serving

occupancy rates were considered robust, and the average of the past three years is 440

AFY.

With respect to legal lots of record, which is defined as lots resulting from a

subdivision of property in which the final map has been recorded in cities and towns, or

in which the parcel map has been recorded in Parcels and Maps or Record of Surveys,

lots of record may include vacant lots on vacant parcels, vacant lots on improved parcels,

and remodels on existing improved, non-vacant parcels. Not all legal lots are buildable.

Cal-Am provided the estimated demands for the Lots of Records (LOR) of 1,181 AFY in

Mr. Svindlands testimony. This number is derived from the October 2009 Coastal Water

Project Final Environmental Impact Report and cites Cal-Ams 2006 Urban Water

Management Plan (UWMP) referencing a 2001 District analysis as the source. The

District does not certify that the 1,181 AFY value is valid. In fact, it was cited from an

interim period between the Land Systems Group Phase II report of August 2000, which

estimated 1,166 AFY for lots of record, but did not include vacant lots on improved

parcels for the City of Monterey or the unincorporated County, and a subsequent June

2002 report that estimated 1,211 AFY, did not include vacant lots on improved parcels in

the unincorporated County. Hence, in the Districts opinion the legal lots of record value

utilized by Cal-Am may underestimate actual.

Q11. If there is water for legal lots of record, how do the rights for that water get distributed?

A11. As mentioned earlier, the Districts 1990 Water Allocation Program was subject to an

Environmental Impact Report as required by the California Environmental Quality Act.

Through the Program, water available for use by parcels was allocated to each


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jurisdiction. To allocate any new water for use on legal lots of record, certain findings

and supplemental filing related to that EIR will be required from the District. The

District will also have the lead role in the allocation to the jurisdictions of new water for

legal lots of record.

Q12. Should the Pacific Grove small water projects offset or reduce the size of the plant?

A12. The District agrees with Mr. Svindland that the small water projects proposed by the City

of Pacific Grove are uncertain at this time and cannot be used to off-set the project sizing.

Q13. Does the District question any of the other assumptions in Cal-Ams project sizing

analysis?

A13. Yes. The District would like Cal-Am to clarify statements made in Mr. Svindlands April

23, 2012 testimony:

On page 17 of that testimony he states sizing accommodates return flow of

Salinas Valley Groundwater during the irrigation months. Has Cal-Am analyzed return

flows throughout the year to non-irrigation uses within Zone 2-C, such as Marina Coast

Water District for use in Fort Ord, and would that have an impact on the sizing of the

plant?

Also on page 17 of that testimony, Mr. Svindland states that the project has been

sized for Table 13 water rights, but no explanation is provided. Attachment 1 to Mr.

Svindlands January 11, 2013 supplemental testimony is a memorandum by RBF

consulting engineers titled Recommended Capacity for the Monterey Peninsula Water

Supply Project (MPWSP) Desalination Plant. The RBF memorandum makes no

mention whatsoever about Table 13 water rights, and the 4,676 AFY of water supplied

from the Carmel River described on page 6 appears to be the 3,376 AFY legal right plus

1,300 AFY of ASR water. The status and effect of Cal-Ams Table 13 water rights

should be clarified.


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IV. DISTRICT POSITION ON GROUNDWATER REPLENISHMENT

Q14. On page 5 of its original application filed April 23, 2012 application, Cal-Am states The

Groundwater Replenishment Project is the second prong of the applicants proposed

Monterey Peninsula Water Supply Project. What is the Districts position on the GWR

project?

A14. The District believes that GWRs role in the water supply solution needs to be elevated

by the Commission. GWR should not be viewed solely as a project alternative, but one

that meets significant and important goals of the state of California.

The statements by the applicant on the role of GWR do not adequately address the

relevant State-wide goals that GWR addresses and should be incorporated. On page 6 of

its original application filed April 23, 2012 Cal-Am stated If the Groundwater

Replenishment Project has reached certain milestones by the time California American

Water begins construction of the desalination plant (currently expected to be near the end

of 2014) and the cost of water from it is reasonable, California American Water will be

able to reduce the size of its proposed desalination plant and so through the use of a Tier

2 advice letter. This is reiterated on page 22 of the April 2012 direct testimony of David

Stephenson of Cal-Am. On page 29 of Mr. Svindlands April 2012 testimony, he

indicates GWR would be incorporated in the project if three criteria are met (i) the EIR is

completed and certified, (ii) there is public support, and (iii) the cost is comparable to

desalination. The District believes these basic statements inadequately address the

importance of GWR as part of the water supply solution.

Q15. What are the State-wide goals or considerations that should be considered in the

evaluation of GWR?

A15. There are four, as described below:

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1)The State Water Resources Control Board strongly supports the use of reclaimedwater. Order WQ 84-7 requires dischargers in water-short areas who propose to

discharge treated wastewater to the ocean to evaluate the potential for water

reclamation. This was specifically recognized within section 19.1 of the SWRCB

Cease and Desist Order (CDO) imposed on Cal-Am with respect to the Pebble

Beach Company reclamation project, but should now be viewed in the broader

context of the CDO and pending State Recycled Water Policy discussed below.

2)The SWRCB released its draft Recycled Water Policy on January 8, 2013. In itsintroduction, the SWRCB states: We strongly encourage local and regional water

agencies to move toward clean, abundant, local water for California by

emphasizing appropriate water recycling and Included in these goals is the

substitution of as much recycled water for potable water as possible by 2030.

The policy also states Groundwater recharge with recycled water for later

extraction and use in accordance with this Policy and state and federal water

quality law is to the benefit of the people of the state of California. and The

State Water Board and Regional Water Boards will exercise the authority granted

to them by the Legislature to the fullest extent possible to encourage the use of

recycled water, consistent with state and federal water quality laws. The GWR

project specifically satisfies this State-wide goal.

3) In 2006, the Legislature passed and Governor Schwarzenegger signed AB 32, theGlobal Warming Solutions Act of 2006, which set the 2020 greenhouse gas

emissions reduction goal into law. It directed the California Air Resources Board

to begin developing discrete early actions to reduce greenhouse gases while also

preparing a scoping plan to identify how best to reach the 2020 limit. GWR

requires 1/8th to 1/10th the electric energy than desalination requires for the same


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throughput of processed product water. GWR should be preferable in order to

meet this State-wide goal.

4) In furtherance of legislative policy set forth in Section 13000 of Division 7 of theCalifornia Water Code (CWC) (Stats. 1969, Chap. 482) pursuant to the authority

contained in Section 13170 and 13170.2 (Stats. 1971, Chap. 1288) the State Water

Resources Control Board finds and declares that protection of the quality of the

ocean waters for use and enjoyment by the people of the State requires control of

the discharge of waste to ocean waters in accordance with the provisions

contained in the Boards Ocean Plan. The Ocean Plan specifically seeks to

limit point discharges to the ocean. GWR has the dual benefit of reducing

wastewater discharge and, by decreasing the size of the desalination plant

required, reducing the discharge of brine waste to the National Marine Sanctuary.

V. DISCUSSION OF KEY FINANCIAL ISSUES

Q16. In Section II above, you stated that Cal-Am should accept, or the Commission should

direct Cal-Am to accept, a contribution of public funds in order to reduce the capital

financing cost to the ratepayer. How does the contribution of public funds reduce costs to

ratepayers?

A16. In concept, a public contribution of funds would reduce the amount of the project that

Cal-Am would have to finance with internal resources or SRF loans. Because the portion

financed with a public contribution would not be included in the ratebase, the revenue

requirement paid by ratepayers for the pretax equity and debt returns on that portion is

replaced by the lower cost of public debt. The remaining portion would be financed by

Cal-Am in a traditional 47% debt/53% equity manner using resources available to the

company, with no impact to its debt-to-equity ratios for credit analysis purposes.


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For example, the pretax return required from rate payers for traditional Cal-Am

financing is 11.96% on the undepreciated ratebase. This is based on the following

assumptions:

47%/53% debt-to-equity ratio 4.30% 30-year debt cost per 1/11/13 Supplemental Testimony of Jeffrey Linam 9.99% equity return 1.4976 gross-up factor for debt cost to pre-tax required, per 1/3/13 Cal-Am

financial model

1.6876 gross-up factor for equity return to pre-tax required, per 1/3/13 Cal-Amfinancial model

Note: The 1/3/13 financial model was updated in the Jeffrey Linam supplemental

testimony errata filed February 15, 2013. The District and its advisors have utilized the

updated model throughout.

If SRF loans are substituted for Cal-Am corporate debt, the pretax return required

is approximately 11.44%, but the amortization of the loan principal is different than the

traditional Cal-Am financing scenario.

The cost of tax-exempt public debt in the current market is 3.6% for a tax-exempt

securitization and 4.0% for a tax-exempt Certificate of Participation structure (see

testimony of Robert Larkins or Exhibit WD-1.) Hence, by comparison, financing a

public contribution is 7.44% to 8.36% more advantageous than Cal-Ams financing

proposal in terms of the pretax return required. This translates to the financial benefits of

a public contribution as discussed in greater detail in the direct testimony of Robert

Larkins, Managing Director of Raymond James & Associates, the Districts financial,

submitted February 22, 2013.

Q17. How might a public contribution be accomplished with minimal impact on Cal-Am or

American Water with respect to accounting, credit rating, or operations?


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A17. The District has proposed two financing structures that in the opinion of the Districts

bond counsel Sidley Austin and Mr. Larkins satisfy the criteria. The proposed financing

structures are contained in Exhibit WD- 1, attached. The financing proposals are

discussed in greater detail in the direct testimony of Robert Larkins, Managing Director

of Raymond James & Associates.

Q18. Are there other financing considerations?

A18. Yes. If SRF loans are not available for the Cal-Am debt component, then the Commission

should require Cal-Am to utilizeax-exempt private activity debt as a funding source if

the marketplace at the time would result in lower cost debt, before accessing debt

financing through American Water Capital Corp (AWCC) as suggested on page 3 of

Mr. Linams Supplemental Testimony.

Q19. Should the financing plan be determined today?

A19. No. By 2016 or 2017 the market conditions for the permanent take-out financing will be

different than today or even a year from now when the Commission renders its decision.

For example, the charts below underscore how the relationship between tax-exempt

municipal debt and taxable corporate and US Treasury debt is much different today than

traditionally, represented by the year 2007. If the tax-exempt marketplace returns to a

more traditional relationship to the taxable marketplace, the advantages of public debt

presented herein would increase significantly. Therefore, financing decisions should be

made in the context of the then-prevailing market conditions. See also the testimony of

Robert Larkins.


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2012 Yield Curve Relationships 2007 Yield Curve Relationships

In all cases, the Commission should require at that point in the future when permanent

financing is considered that the then-current market conditions be considered and, if

warranted, the financing alternatives be evaluated. This requirement should be done with

the involvement of the Commission, the District and its advisors, or the Governance

Committee discussed in Question 26, below, if approved.

Q20. What is the Districts view of the use of net present value (NPV) for evaluating or

comparing financing alternatives?

A20. The District shares the view of the California Department of Water Resources as laid out

in its January 2008 Economic Analysis Guidebook. Specifically, economic

comparisons of projects are most commonly made on the basis of net benefits. Net

benefits are determined by estimating discounted benefits and costs over the study period,

and then subtracting the discounted costs from the discounted benefits to obtain

discounted net benefits. The net benefit criterion does not take into account the absolute

level of costs involved in realizing the net benefits, thus it should be used only when the

projects being compared are of similar objectives and size. Here, where we are

comparing water supply projects that produce the same amount of water for the

Peninsula, then to compare alternatives one must only look at the cost side as reflected in


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the discounted or NPV value of future costs, as reflected in the combined O&M and

financing costs over the life-cycle of the project.

The District requests that the Commission require alternative financing

approaches to be evaluated utilizing NPV evaluation, not simply a single test year

revenue requirement.

Q21: What is the appropriate discount rate for NPV analysis?

A21: Not the 12.1% default value contained in Cal-Ams January 3, 2013 financial model.

According to the California Department of Water Resources Guidebook The discount

rate is used to adjust dollars received or spent at different times to dollars of a common

value, usually present day dollars (present worth or present value). Although there

are different methods for determining discount rates, generally the value to use for this

rate is the real (that is, excluding inflation) rate of return that could be expected if the

money were instead invested in another project. In other words, the discount rate is a

measure of forgone investment opportunity (that is, opportunity cost) if the money

allocated to the project were invested elsewhere. The selection of a discount rate is

critical for the analysis because the larger the discount rate, the greater the reduction in

future monetary values. This tends to affect benefits more than costs because the majority

of costs are incurred early in the analysis period (for example, construction costs);

whereas, benefits typically occur later in the analysis period. DWR is currently using a

6% discount rate. The US Treasury Department annually sets the discount rate used by

the Corps and the Bureau. For 2012, the US Treasury discount rate for the Corps was

4.0% and can be found in the publication Economic Guidance Memorandum, 12-01,

Federal Interest Rates for Corps of Engineers Projects for Fiscal Year 2012.

In the analysis prepared by Mr. Larkins and included in his testimony, a more

conservative 6.0% discount rate was used. Please refer to Mr. Larkins testimony for

more discussion of the use of NPV and the discount rate. If the Commission uses NPV


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analysis as an additional evaluative tool, a lower discount rate in the 4% to 6% range

should be used.

Q22. What is your view of the Supplemental Testimony of David Stephenson of Cal-Am with

respect to NPV?

A22. Most of Mr. Stephensons supplemental testimony on NPV in pages is inconsistent with

industry practice and counter to the California Department of Water Resources

Guidelines. The suggestion of the Division of Ratepayer Advocates during the December

2012 cost workshops to include NPV was not for determining the specific long-term

value of a project to a corporation as suggested by Mr. Stephenson on page 6 of his

testimony, rather to compare alternate cost structures for projects that deliver the same

benefit, in order to determine the lowest cost impact on ratepayers. Contrary to Mr.

Stephensons statement that discounting a stream of revenues has extremely limited

value and really only provides a current value of future cash flows the use of NPV is

widely used in economic evaluation of capital projects to determine lowest cost impacts.

We also disagree with his statement on page 4 that a variable discount rate might

be used, as this is contrary to industry practice. We somewhat agree with his statement

that a firms weighted average cost of capital (after tax) is often used. Cal-Am has

calculated that its weighted average cost of capital for the Monterey Peninsula Water

Supply Project is less than 4.0% (Robert MacLean, Guest Commentary, Monterey

Herald, January 12, 2013.) This is far different from the 12.1% default assumption in the

Cal-Am financial model, but more consistent with State and Federal guidelines.

We do agree with the statement on page 8 of Mr. Svindlands Supplemental

Testimony that in performing NPV analysis assumptions can lead to unfair comparisons;

future capital replacements have a large effect on results; and that NPV analysis doesnt

capture permitability or legal risks. However, none of these are reasons not to utilize


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NPV analysis for purposes of evaluating alternative financing structures for the Monterey

Peninsula Water Supply Project.

Q23. Does the District have any additional views on the use of Surcharge 2?

A23. The District has endorsed the use of Surcharge 2, subject to the discussion included in my

response to Question 9 above. The analysis by the Districts financial consultant

confirms that the use of the Surcharge 2 can save ratepayers $60 million on a net present

value basis and approximately $ 240 million over the life of the project. Please refer to

Mr. Larkins testimony for more discussion of Surcharge 2.

This appears consistent with Mr. Stephensons initial 2012 testimony (p. 40) that

every $50 million in Surcharge 2 saves $7.3 million in the test year revenue requirement,

although the debt-to-equity ratio assumed at that time was a bit different. The point

being, use of a surcharge is economically beneficial, irrespective of its intertemporal

effects on who pays, when.

Q24. Does the District have any additional views on GWR costs?

A24. Yes. Page 6, Table 3, of Attachment 3 to Mr. Svindlands Supplemental Testimony

(RBF memorandum on MPWSP Capital and O&M Cost Estimate Update) utilizes $3,000

per acre-foot for product water from GWR. However, the Cal-Am Public Participation

Hearing Presentation, January 9, 2013 utilized a range of $2,000 to $2,600 for GWR

product water. The District urges all parties to this proceeding to give consideration to

the concept that the go/no go decision on GWR will be made in the future when costs

are better known.

Additionally, I want to underscore that according to page 35 of the April 23, 2012

initial testimony of David Stephenson of Cal-Am, by implementing GWR there are

reductions to the revenue required from ratepayers on the order of $500,000 per year as a

result of decreased ad valorem taxes.


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Q25. Does the District have a view on costs associated with service to legal lots of record?

A25. Yes. The District agrees with the concept proposed on page 11 of Mr. Stephensons

Supplemental Testimony that a connection fee should be authorized by the Commission

for new connections for legal lots of record. However, we do not at this time agree with

the proposed $24,000 amount which is based on the Districts current charge. We

suggest that the Commission direct Cal-Am and the District to coordinate on the analysis

and setting of a connection fee for new connections.

VI . DISCUSSION OF GOVERNANCE ISSUES

Q26. What is the Districts proposal for public involvement in the management of the

desalination facility?

A26. Public Agency Participation Proposals were submitted October 1st. ALJ Weatherford

described the purpose of such proposals in the following manner:

While the Application contemplates some complementary public agency projects

(groundwater replenishment and aquifer storage and recovery), there may be

opportunities for one or more public agencies to have a direct role in the Monterey

Peninsula Water Supply Project itself. Cal-Am should be open to and seriously

consider in good faith any public agency proposal for direct participation in the MPWSP

made to it no later than October 1, 2012.

On page 18 of his Supplemental Testimony, Mr. Svindland states, California

American Water is continuing to negotiate with the MPRWA, MPWMD, and the County

regarding governance and financing. This remains true. The District has been working

jointly with the Authority and with Cal-Am to develop a potential framework of

governance that might not only provide greater public oversight than would be afforded


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public entities in other regulated utility settings nationwide, but would also provide

meaningful local Peninsula participation in three key areas of District concern: (i)

transparent reporting of activities to the public; (ii) decision-making authority over

certain selected key issues; and (iii) commitments to work jointly on several important

topics.

To this end, the District supports implementation of the proposed Governance

Committee as described in Exhibit WD-2.

VII . THE DISTRICTS ALTERNATIVE BACK-UP PROJ ECT

Q27. It appears in this testimony the District is supporting the application of Cal-Am, subject

to certain conditions detailed above. Why is the District continuing to evaluate potential

alternative projects?

A27. Of the eight conditions described at the outset of my testimony, conditions 5 and 6

highlight concerns the District and others have about the Salinas Valley Groundwater

Basin (SVGB) water rights and litigation risk. The District continues to evaluate

alternative desalination proposals as a hedge against litigation risk.

Intervenors to the Commission proceeding A.12-04-019 include agricultural

interests represented by the Salinas Valley Water Coalition, the Monterey County Farm

Bureau, LandWatch, and to some extent the MCWRA. A key conclusion one can make

from their filings to date is that litigation presents a significant risk.

In its June 2012 filing the Salinas Valley Water Coalition raised concerns that the

proposed projects source of water will include an amount of groundwater from the

SVGB and questioned how the wells will be operated in the short-term and in the long-

term, so as not to impact the SVGB, existing seawater intrusion and/or the overall

hydrological balance of the basin, how the project will be monitored, and what triggers

will be put into place to assure the Salinas Valley residents, businesses and agricultural

landowners that no freshwater over that which is analyzed and permitted will be pumped.


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They stated that the needs of the Peninsula cannot be met at the expense of degradation

to the Salinas Valley Groundwater Basin and those who steward it because of our

reliance upon it.

The Coalition also asserted that water rights and legal uses of water within the

SVGB and any impact to these rights and use, must be considered within the context of

the proposed project and the proceeding. They claim that Cal-Am must identify valid

appropriative water rights that can be utilized in the manner they are proposing. The

Coalition seeks assurances that its members Salinas Valley water rights are not adversely

impacted; that there are valid water rights identified to operate the project in the manner

proposed; that the water rights are utilized in a manner that do not harm prior right

holders; that the project will not harm the SVGB, impact its aquifers, exacerbate seawater

intrusion and/or the basins water balance; and finally, the project will not export

groundwater out of the Salinas Valley Basin.

The Coalition specifically states Use of the groundwater in any other manner

would be an illegal appropriation of groundwater from the overdrafted Basin, and would

result in an illegal taking of groundwater from overlying landowners.

The Opening Brief on Various Legal Issues of Monterey County Farm Bureau

expresses strong concern over water rights. The Farm Bureau asserts Cal-Am has not

identified any water rights that allow withdrawal of freshwater from the SVGB using the

proposed slant well system and warned should Cal-Am pursue an appropriative right for

freshwater withdrawals from the Salinas Valley Groundwater Basin, a costly adjudication

for total water rights would be required basin-wide. This would present a lengthy and

expensive process for Salinas Valley landowners, who have no potential benefit from the

Cal-Am project.

The Farm Bureau is concerned that placing the well sites potentially infringes on

the water rights of Salinas Valley landowners and has challenged Cal-Am to locate an

alternative site along the coast that does not have the same issue with SVGB rights and


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would alleviate the issue of appropriative water rights. The state, Without the proper

identification of water rights for the specific project site, the project is flawed and should

not move forward.

In its letter of support for the County to join the Monterey Peninsula Regional

Water Authority, the Farm Bureau stated Salinas Valley water users are at risk as the

current Cal-Am project proposal places their slant wells within the boundaries of the

Salinas Valley aquifer area; this would cause a protracted water rights dispute and

possibly trigger an adjudication of the water basin and that the Farm Bureau does not

support any water project that places a straw in the Salinas Valley aquifer.

LandWatch also makes several claims in its Reply Brief of LandWatch Monterey

County Regarding Groundwater Rights, including (i) whether the project would cause

harm to others groundwater rights should be addressed through an independent

hydrological assessment as soon as possible, (ii) it is clear that the SVGB is in overdraft

even if that fact has not been judicially determined, hence there is no surplus water for

the project to appropriate, (iii) providing the groundwater to CSIP, Cal-Am may avoid

violation of the MCWRA Agency Acts ban on export of groundwater. However, this

does not mean that Cal-Am is not appropriating groundwater at the expense of other

groundwater users who may be injured by any additional pumping.

Cal-Ams response in its Cal-Am Opening Brief on Legal Issues for Early

Resolution and its Cal-Am Reply Brief on Legal Issues for Early Resolution is that its

proposed Project likely does not require water rights because Cal-Am proposes to use

ocean water as its source water supply and will return to the SVGB all water that

originates therefrom. Moreover, even if water rights were required, such rights would be

appropriative in nature and may be acquired, developed and perfected consistent with

well-established principals of California water law. Additionally, despite allegations to

the contrary, the water development for the Project is consistent with the MCWRA


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Agency Act. Therefore, although multiple parties have raised water rights issues related

to the Project none of the claims affect the feasibility of the Project.

The Commission asked Cal-Am to discuss, in its Contingency Plan Compliance

Filing dated November 1, 2012, if there is an availability of alternative well or intake

locations in event slant wells fail or do not reliably supply sufficient rate or volumes.

This may also be viewed as a proxy for alternatives to pumping SVGB water from the

180-foot aquifer. Cal-Am indicates in the Compliance Filing that it has the following

contingencies in the event that a new brackish water source is needed: 1) install a shallow

slant well at the Cemex property that extracts from the Sand Dunes Aquifer; or 2) install

a Ranney Well at the Cemex property that extracts from the Sand Dunes Aquifer; or 3)

install an open ocean intake at the Cemex property; or 4) install the slant well intake

system at Portrero Road with feedwater pumped to the proposed desalination plant at the

Charles Benson Road site, and brine discharge to MRWPCA outfall; or 5) install direct

intake of ocean water and pump feedwater to the proposed desalination plant at the

Charles Benson Road site, and brine discharge to MRWPCA outfall.

The fifth option can be accomplished by either: (i) Diverting water from Moss

Landing Harbor by using existing Marine Refractories intake infrastructure with

modifications, or tapping into the Moss Landing Power Plants (MLPP) spent cooling

water system; (ii) A Ranney Well comprised of a vertical caisson that extends vertically

down 50 to 100 feet, from which horizontal wells would be launched radially outward

towards the ocean. The maximum length per horizontal well is approximately 200 to 400

feet; (iii) Tapping into MLPPs cooling water intake system; (iv) Diverting water from

the ocean by converting existing Marine Refractories outfall into an open ocean intake, or

constructing a new ocean intake at or near Moss Landing. However, Cal-Am is clear to

state that due to concerns about feasibility, cost and other variables associated with these

contingencies, the Commission should not simply substitute these contingencies for the

proposed projects brackish water source component unless the situation calls for it.


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Hence, Cal-Am will continue to develop its proposal project as planned, until determined

infeasible.

The schedule in proceeding A.12-04-019 calls for a final Environmental Impact

Report (EIR) in November 2013 with a Commission Proposed Decision to follow shortly

thereafter. Final Commission action on the Proposed Decision is planned for January

2014. It is unclear if a decision can be rendered without resolution of the water rights

issues discussed above, but we can assume that, just as in the case of the Regional Project

previously, the Commission may issue a CPCN before any data is obtained from the test

wells.

However, the test wells may be a critical path in forestalling litigation over

SVGB water rights. One of the proposed methods to address the concerns of the

agricultural interests is to develop the supply source from shallow Sand Dunes Aquifer.

The growers have indicated that such a solution would be satisfactory. Cal-Am has

indicated that it will gather the necessary data on the shallow aquifer from its test well.

However, the construction of a test slant well is time constrained, as well.

Based on the recently completed biological survey of the slant intake well site,

several important species were identified. Most notably, the survey indicated the presence

of the Snowy Plover, a bird with nesting habitat, which most likely cannot be disturbed

between March and September of each calendar year. In order to meet this small

construction window of October to February, Cal-Am worked quickly to attempt to

obtain all necessary permitting so they could begin the installation of the test well in the

2012-13 window. Cal-Am has reported that it did not secure the necessary permits and

will have to wait until the 2013-14 Snowy Plover window. This places data gathering

over a year away.

Further, gathering data from the test well may take one to two years. In the case

of the prior Regional Project, one of the proposed conditions of the Coastal Development

permit from the Coast Commission was a potential two-year testing period, as shown in


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the August 2011 Addendum to Staff Report E-11-019 Test Slant Well, Page 9, last

paragraph, Section 4.1 Project Purpose and Description and Page 10, third paragraph,

Section 4.1 Project Purpose and Description which may be found at

http://mpwmd.net/asd/board/boardpacket/2012/20121210/12/item12_exh12h.pdf . The

permit was never issued, so there is no way to tell if the conditions would have been

enacted.

Hence, data to support a shallow Sand Dune Aquifer approach will not become

available until early 2015, and possibly as late as the beginning of 2016.

Therefore, a single linear path that relies on test well data to resolve potential

litigation creates significant risk that the Cal-Am project proposal to use slant wells may

not work or become significantly delayed. Indeed, even if data are available, it may not

yield a solution that will avoid litigation. It may be in the Monterey Peninsula

communitys interest to develop a parallel process to advance or qualify an alternative

project as a safety contingency. The District continues to support steady advancement of

the Cal-Am application at the Commission, while at the same time may work to advance

environmental review and permitting of an alternative water source. This alternative

project would be a back-up to Cal-Ams proposal.

Q28. Has the District identified an alternative project?

A28. No. It received statements of qualification from project proponents on February 15,

2013.The District has not made a determination if any project merits continued

evaluation and/or advancement. It may choose to work with a project proponent or

determine no project warrants further evaluation or financing

.

Q29. If the District identifies a project that may be viable, cost effective, and permitable in a

timely fashion what does the District expect from the Commission?


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A29. Although the evaluation of alternative projects was initiated as a contingency or back-

up plan, the District concedes that it is possible an alternative project may prove to be

cost advantageous. The District reserves the right to inform the Commission of its

progress on an alternative within the context of this application and will inform the

Commission if an alternative source water strategy or a purchase water contract strategy

appear viable.

VIII. OTHER MISCELLANEOUS AREAS OF DISTRICT INTEREST OR CONCERN

SVGB RETURN FLOWS

Q30. Has Cal-Am updated the estimate of freshwater that will be extracted with the seawater

from the source wells?

A30. It does not appear so, but perhaps the District needs to be directed. Page 10 of Mr.

Svidlands April 2012 testimony states that the 2008 Geosciences Support Services Inc.

says the seawater concentration would be 94-97% TDS. Given the new well locations

and the proposal to screen the wells in the sand dune aquifer, this conclusion might

change. Hopefully, this issue is being re-examined as part of the CEQA review.

Q31. Do the proposed SVGB return flows have value?

A31. The District believes the return flows are undervalued and could provide cost savings to

the ratepayers. Appendix H of the initial application, a memorandum by RBF

consultants, states on page 10 that roughly 3% of the source water will be SVGB

freshwater that will be conveyed through a return pipeline to the CSIP irrigation storage

pond for use by the growers. The District believes that the water has value that has not

been addressed. Presently, growers pay over $200 per AF of recycled water from CSIP.

Given that the return water is highly purified potable water its value would be even

greater for potable uses in Zone 2-C such as the City of Marina or Fort Ord revelopment,


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perhaps on the order of $2,000-$3,000 per AF. Peninsula ratepayers would benefit if

project costs could be offset by the sale of SVGB return flows.

IX. SEASIDE BASIN OPERATIONS

Q32. What are the Districts concerns with respect to future operations of the MPWSP

components as it relates to the Seaside Basin?

A32. Attachment 3 to the April 23, 2012 Direct Testimony of Richard C. Svindland is a

memorandum from RBF Consulting which details proposed operations of the Cal-Am

desalination facility. Tables 2 and 3 of the memorandum show monthly average flows

into and out of the Seaside Groundwater Basin from the desalination facility, GWR, and

ASR. This was updated in Mr. Svindlands Supplemental Testimony as Attachment 1,

pages 7 and 8 of the updated RBF Memorandum. To date, there has not been sufficient

data presented to address the following issues:

1) Source water mixing Carmel River water diverted to ASR generally has 300mg/L TDS (total dissolved solids) and 26 mg/L Chloride and native Seaside Basin

groundwater (Santa Margarita aquifer) is generally 600 mg/L TDS and 120 mg/L

Chloride. What will desalinated water and GWR water TDS and Chloride levels

be and will the mixing of these sources yield adequate water quality within the

basin?

2) Potential for seawater intrusion or groundwater flow anomolies does thehydrogeology of the basin permit operations as proposed with no impacts to

seawater intrusion or changes in the production capacity of existing well owners?

e.g., Will production only occur from injection sites, or will production occur

from wells at different locations from injection? What are the impacts to water

quality and quantity in the basin from these operational alternatives?


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MPWMD believes there is a need for mixing studies, hydrogeology flow studies

and operations modeling, and hydraulic analyses to demonstrate Cal-Am system

capability to operate in the manner demonstrated. It is not clear that RBF has performed

any of these and its analysis may be a simple water accounting. The District seeks

clarification in this regard.

X. CITY OF PACIFIC GROVE SMAL L WATER PROJECTS PROPOSAL

Q33. Does the District have an opinion about the City of Pacific Groves small water projects

as presented in its October 1, 2012 Public Participation Proposal to Cal-Am?

A33. Yes. The District supports the development of alternative non-potable sources of water

in order to free-up additional potable water supply.

Q34. Does that conclude your direct testimony?

A34. Yes, it does. Thank you.

Exhibits:

WD-1 Proposal Letter to California American Water

WD-2 Administrative Draft of Governance Committee Agreement

U:\GENERAL (NEW)\MPWMD - Main\PUC - A.12-04-019 (MRY Water Supply Project)\Testimony\Dave Stoldt\Revised Direct Testimonyof Dave Stoldt.docx


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EXHIBITWD-1


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EXHIBIT WD - 1

5 Harris Court, Building G, Monterey, CA 93940 P.O. Box 85, Monterey, CA 93942-0085

831-658-5600

Fax 831-644-9560

http://www.mpwmd.net

February 5, 2013

Mr. Rob MacLean

California American Water Company

1033 B Avenue, Suite 200

Coronado, CA 92118

Subject: Proposal for a Public Contribution of Funds in A.12-04-019

Dear Rob:

This letter is to better define alternatives for how a public contribution of funds might be crafted for the

capital expenditures related to the proposed desalination facility in A.12-04-019.

Alternative 1: Traditional Tax-Exempt Borrowing

Form of Issuance The simplest form of issuance of public debt would be tax-exempt Certificates of

Participation (COPs) issued by the Monterey Peninsula Water Management District (District.)

Alternatively, the District could join with the Monterey Peninsula Regional Water Authority (Authority)

to form a separate joint-powers authority (JPA) for purposes of the financing, which JPA could issue

revenue bonds instead of COPs. For now, lets assume issuance of COPs by the District. The proceeds

of the issuance would be contributed to Cal-Am to offset a portion of the cost of building the project.

The COPs will be tax-exempt, but deemed private activity under federal tax law, hence subject to the

Alternative Minimum Tax (AMT). A volume cap allocation would need to be secured from the California

Debt Limit Allocation Committee for issuance of such private activity COPs, which the District would

secure far in advance of the need to issue to debt.

Security The debt will be secured by payments from the Districts water supply enterprise Net

Revenues. Net Revenues are Gross Revenues minus District water supply enterprise operating

expenses. Gross Revenues include a Surcharge collected on the Cal-Am bill, similar to the Districts old

User Fee, the Districts existing Water Supply Charge, certain permit fees, interest earnings, and

amounts in a District Rate Stabilization Fund. It is assumed that the Surcharge is set to equal 100% of

debt service due in each future year, but the surcharge for any individual customer would be based on

the water consumed on the bill (or a percentage of the cost of water on the bill.) The water used by a

customer reflects supply received from the water supply projects, hence the surcharge is a fee directly

related to use of water.

The District will covenant to maintain Net Revenues in an amount equal to 125% of debt servicerequired in each year the Coverage Requirement. District will pledge to enact a Proposition 218

process in the future to maintain the Coverage Requirement, should Cal-Am collections falter and the

Surcharge is inadequate. The Proposition 218 process utilizes a majority protest proceeding to enact

fees for water service. Investors in California municipal water and wastewater debt are familiar with the

risks inherent in future Proposition 218 hearings.


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The District will also borrow and maintain a debt service reserve fund equal to one years debt service.

Although the primary source of revenue for repayment is the surcharge, by pledging its existing and

certain future additional revenues which are subject to Proposition 218, it is a public credit and Cal-Am

would agree that it would not book the surcharge as a debt. At this time, the Districts financial

consultants believe this public credit would attain investment grade credit ratings.

Legal Structure We are cognizant that Cal-Am has requested no strings be attached. In light of this

goal, but to comply with state law in a manner that allows such a borrowing to occur, we will need to

construct an ownership interest in something that can be bought and sold. Our view is that this

ownership interest is merely a paper structure and would not affect Cal-Ams financial interests. One

way this might be structured is described below.

The financing would be structured using a local financing entity which could be a joint powers agency

(such as the Authority) or a financing corporation organized pursuant to the Nonprofit Public Benefit

Corporation Law of the State of California (Title 1, Division 2, Part 2 of the California Corporations Code.)

The financing entity is a common and traditional component of California COP financings, and there arealready existing several in Monterey County available for this purpose.

For any public amount proposed to be contributed (X dollars), compared to the total cost of the

facility (Y dollars), a Water Right would be created in the amount (XY) x (Plant Capacity) x (term of

the debt). That Water Right is acquired by the financing entity from Cal-Am with the proceeds of the

sale of the COPs in the public market. Although the Water Right will be acquired from Cal-Am, Cal-Am

will agree to continue to purvey the water in the same manner as other water conveyed through its

system.

The mechanics of the financing are otherwise routine for a public debt issuance in California. The

District will enter into an Installment Purchase Agreement with the financing entity, whereby the District

will sell the Water Right to the financing entity and simultaneously repurchase the Water Right in annualinstallment payments, equal in amount to the annual principal and interest due on the COPs. At the end

of the 30-year term of the COPs, the District would sell all of its interest in the Water Right to Cal-Am for

a dollar.

The financing entity will unconditionally grant and assign to a Trustee bank, without recourse, all of its

rights to the annual installment payments, for the benefit of the COP investors. The financing entity has

no liability to the investors in the COPs. The District will pay its installment purchase payments directly

to the Trustee. Thus the financing entity does not have an ongoing role or obligation.

Amount The District proposes a public contribution up to $100 million. Ultimately the amount of

public contribution should be determined based on the availability of State Revolving Funds and marketconditions at the time of permanent take-out financing.

The District has stated a preference for using revenues from a surcharge on the Cal-Am bill as the

primary source of repayment, although other District revenues can bolster the pledge for security

purposes. The goal would be to utilize the Districts existing User Fee that has been subject to

suspension by the CPUC, but could be reinstated by the CPUC for this purpose. In the Districts view, the

User Fee has never been terminated, and in fact is still collected from the City of Seaside municipal


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water system, as well as from the Pebble Beach Reclamation Project. Collection from Cal-Am, while

suspended, remains subject to an open proceeding before the California Superior Court, and a separate

review process before the California Supreme Court. As an alternative to using the prior User Fee, the

CPUC could also approve a new fee for this purpose.

The portion of the existing User Fee that pre-dates Proposition 218 is an amount equal to 7.125% of theCal-Am customer charges. Based on the Cal-Am notice for the Public Participation Hearings, the

proposed annual revenue requirement following implementation of the project is $102,539,000.

Applying a 7.125% factor, the existing User Fee would be $7.3 million per year. At an assumed interest

rate of 3.75% and 30 years, that annual amount could support over $130 million of COP issuance.

Alternative 2: Tax-Exempt Securitization Borrowing

What is Securitization? Cal-Am would establish, collect, and adjust from time to time a non-

bypassable charge on its customers sufficient to pay off the annual securitization payments. The PUC

would issue a financing order to enable the financing. Under the structure Cal-Am would be requiredto sell the property right, consisting of the right to impose, collect, and adjust from time to time the

non-bypassable charge to a Cal-Am subsidiary (a Special Purpose Entity or SPE), or to a governmental

entity SPE which is established as bankruptcy remote (i.e., not permitted to file under Chapter 9). The

sale of the property right by Cal-Am would be a true sale for bankruptcy purposes. The SPE could be

established by the District. Alternatively, the legislation could authorize the State Infrastructure Bank to

issue the bonds, as it has done in the past for stranded cost financings. The SPE would issue bonds

payable from the non-bypassable charge. The bonds should likely be rated AAA by all three rating

agencies, and would be tax exempt as well, either through a sale to the District, or the use of a conduit

entity to buy Cal-Am SPE debt. AAA-rated tax-exempt debt could be the lowest cost source of

financing. This would remove the Districts credit from the equation, and the Districts role might simply

be in the form of partnering to create the SPE and passing special legislation (see below.)

While most (if not all) utility securitizations to date involve electric utilities, these principles should apply

to any regulated utility with a broad customer base. While many prior securitizations have been used to

recover the costs of electric deregulation (stranded costs), utility securitization has also been used to

recover storm or hurricane costs, to finance pollution control facilities, to stabilize customer rates and

for other cost recovery. It is noteworthy that in West Virginia, the securitization legislation expressly

limited the use of securitization to a utility with less than an investment grade rating; in other words, the

purpose of the legislation was to assist a lower rated utility to borrow at an advantageous rate.

Legislation Required Securitization would require authorization from the California legislature and a

financing order issued by the California PUC pursuant to the legislation. The legislation would

authorize creation of a property right, consisting of the right to impose, collect, and adjust from time to

time the non-bypassable charge on Cal Am customers sufficient to pay off the securitization. The

legislation would authorize the PUC to issue a financing order to enable the financing. As discussed

above, under the legislation and the financing order, Cal-Am would be required to sell the right to

collect the non-bypassable to an SPE, or a bankruptcy remote conduit issuer such as the State

Infrastructure Bank, or an SPE created by the District.

The legislation would be substantially identical to legislation both previously enacted, or proposed for


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California electric utility use. To date approximately $10 billion of utility securitization have been issued

for the benefit of California utilities. The Districts Bond Counsel Sidley Austin LLP has drafted

legislation which could be readily adopted for this purpose.

Rating Agencies View Standard & Poor's believes that proceeds of the securitization are expected to

be used principally to shrink a utility's total capitalization structure and generate savings that are passedalong directly to customers in the form of lower rates. S&P has said Generally, the amount of rate

reduction bonds that the utilities issued was designed specifically to generate a legislatively mandated

rate reduction for customers.

Most state statutes specifically provide for securitization of the utility costs through their sale to a

financing subsidiary of the utility. In this instance, the sale of the property right might be made to a

financing entity formed by the District in order to provide tax-exempt financing. Alternatively, the

financing subsidiary of Cal-Am could sell its bonds (instead of the property right) to the District entity,

once again to provide tax-exempt financing. The statutes award true sale status to the transfer of the

assets to a finance subsidiary. This should help support the legal conclusion that the transfer constitutes

a true sale for bankruptcy purposes.

The statutes also provide that any proposal for a securitization of utility costs be approved on an

irrevocable basis by the relevant utility regulatory commission, here the CPUC. The CPUC must set a

tariff schedule. A tariff would be included in the ordinary bills sent to customers, and would amortize

the costs over the life of the proposed securitization. The tariff would be a separate itemized charge on

the customer's bill, and could be either a fixed charge or tied to water usage. Where the tariff is tied to

usage, predicted customer usage will be important from a credit perspective. Tariffs that are actually

collected from customers may fall short of what was originally anticipated. In addition to defaults in bill

payments, the customer base might decline due to economic and/or technological factors, or usage

might vary from what was originally predicted. These are credit risks that could impact the ability of the

tariff to amortize the assets fully. To address these risks, legislatures have created a statutory form of

credit support, known as the "true-up" mechanism. The statutes provide that the utility periodicallyapply to the CPUC for a readjustment of the tariffs. The commission must then readjust the tariffs

charged to customers, so that the bond amortization schedule is met. This minimizes credit risk, except

in the tail end of the transaction after the final true-up has occurred.

The Districts financial consultants, Raymond James, and bond counsel, Sidley Austin, have reviewed

these two concepts and can confirm their viability for use in reducing the cost of the desalination project

to ratepayers. Certainly, if an insurmountable roadblock reveals itself during the pursuit of either of

these, it would occur early enough in the process such that Cal-Am could continue with its traditional

financing from American Water Capital Corp without inconvenience.

I look forward to discussing this proposal with you and your team in greater depth going forward.

Sincerely yours,

David J. Stoldt

General Manager


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February 21, 2013 Subject to Revision

Administrative Draft of Feb 21, 2013 (subject to change). 1

AGREEMENT TO FORM THEMONTEREY PENINSULA WATER SUPPLY PROJECT GOVERNANCE COMMITTEE

This AGREEMENT TO FORM THE MONTEREY PENINSULA WATER SUPPLY PROJECTGOVERNANCE COMMITTEE (Agreement) is made and entered into as of February __, 2013, by andamong the MONTEREY PENINSULA REGIONAL WATERAUTHORITY (MPRWA), the MONTEREYPENINSULA WATER MANAGEMENT DISTRICT (MPWMD), the COUNTY OF MONTEREY(County), and the CALIFORNIA-AMERICAN WATER COMPANY (Cal-Am). The MPRWA, theMPWMD, the County, and Cal-Am are sometimes referred to individually herein as a Party, andcollectively as the Parties.

I. Formation of Governance Committee

Pursuant to the terms of this Agreement, the Parties hereby form the Monterey Peninsula Water SupplyProject Governance Committee (Governance Committee) comprised of representatives of theMPRWA, the MPWMD, the County, and Cal-Am to ensure efficient and effective public input into thedevelopment and operation of the Monterey Peninsula Water Supply Project(Project). Cal-Ams entryinto this Agreement is expressly conditioned upon its legal obligations to abide by the orders anddecisions of the California Public Utilities Commission (CPUC). Therefore, should the CPUC order Cal-Am not to participate in this Agreement, Cal-Am shall be relieved of all obligations set forth in thisAgreement and this Agreement may be terminated by Cal-Am upon such CPUC order. Further, if theCPUC issues any order or decision that conflicts with any particular provision of this Agreement, Cal-Amshall be relieved of any and all obligations to abide by the conflicting provision of this Agreement.

II. Definitions

A. Application A.12-04-019. Application of California-American Water Company (U210W)for Approval of the Monterey Peninsula Water Supply Project and Authorization to Recover All Presentand Future Costs in Rates, filed with the CPUC on or aboutApril 23, 2012.

B. ASR Infrastructure. The facilities used to inject into and extract potable water from theSeaside Groundwater Basin, as described in Application A.12-04-019. These facilities will include theAquifer Storage and Recovery (ASR) wells and related appurtenances, the backflush pipeline, the

recirculation pipeline and the ASR pipeline.

C. Brine Discharge Infrastructure. Facilities located outside the desalination plant site thatare used to dispose of brine into the ocean. These facilities will include the brine disposal pipeline, thebrine receiving station, any modification to the MRWPCA existing outfall, or a new outfall, or potentiallythe use of other existing outfalls with or without modifications.

D. Cal-Am Notification. The written notification from Cal-Am to the Chair of theGovernance Committee that a matter is ready for consideration, consultation, or action by theGovernance Committee as provided herein, and as further defined within Section V.B.

E. CEQA. The California Environmental Quality Act.

F. Contracts. One or more of the contracts between Cal-Am and a selected contractor,valued in excess of $1 million, relating to the design and/or construction of the following facilities: (1) theDesalination Infrastructure, (2) the Source Water Infrastructure, (3) the Brine Discharge Infrastructurecontracted for by Cal-Am, (4) the Product Water Pipeline, (5) the Raw Water Pipeline; (6) the ASRInfrastructure, and (7) the Terminal Reservoir Infrastructure. Contracts for one or more of the facilitiesidentified above in this definition may be combined into a single contract. In addition, the design andconstruction of a single facility identified above in this definition may be combined into a single contract.


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February 21, 2013 Subject to Revision

Administrative Draft of Feb 21, 2013 (subject to change). 2

G. CPCN. The Certificate of Public Convenience and Necessity, if ordered by the CPUC,within

a 12-04-01 direct testimony of david j stoldt mpwmd.pdf

Documents