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The Monterey Peninsula Water Supply Project (MPWSP) Cost and Financial Modeling Workshop took place December

11-12, 2012. These notes provide a broad overview of the issues discussed during the 2-day workshop. For a more detailed accounting of the presentations, please review the slides that California American Water (CAW) provided. The workshop presentations will be posted on the following website: Day One of Workshop: December 11, 2012 Rob MacLean, President of CAW, provided a preliminary introduction and updated the participants on the following items from the last workshop: 1) the impact of conservation on pricing; and 2) status of efforts to consider price elasticity at the prior workshop. I. Project Costs a. Impact of Conservation

Patrick Pilz, Director of Conservation for CAW, discussed the impact of conservation on demand elasticity as well as various scenarios to illustrate the point that CAW cannot meet the CDO requirements through conservation alone. The first scenario showed the impact of eliminating 200 acre feet (AF) of demand in tier 5 without a revenue requirement change. This would result in a 16% rate increase for all tiers to make up for the lost consumption in tier 5. The second scenario showed the impact of cutting consumption through retrofitting all residential households in Monterey with ultra high toilets. At a cost of $21 million, CAW could achieve an assumed annual savings of 420 AF. Mr. Pilz then went on to discuss water demand price elasticity factors concluding that a number of conservation efforts, including conservation rate design, in the Monterey County District have essentially made demand inelastic. Mr. Pilzs presentation considered numerous factors, including indoor and outdoor usage (60 gallons/day per capita in the Monterey County District), minimum water requirement per capita by health standards for sanitation, and food preparation showing elasticity in order to reach his demand inelasticity conclusion. Additionally Mr. Pilz noted that much of the literature on the subject is almost a decade old and does not apply to the Monterey County District. Additionally, CAW implemented many of the conservation measures called for in the decade-old literature. Additional research produced by Tom Chesnutt, which analyzed Monterey County District billing data for last 10 years, concluded that the likely scenario shows -0.05 elasticity (tier 1) to 0.16 (tier 5) and less likely scenario would produce -0.07 to -0.23 elasticity (tier 1 and tier 5, respectively). CAW also calculated elasticity based on the most recent 14 months of data, compared to a prior three-year average. Although rates increased close to 50%, residential demand increased during this 14-month period. Through conservation efforts, CAW has saved approximately 957 AF at a cost of $4,580 per AF. However, the low hanging fruit has already been picked. An additional supply gained through conservation will come at a higher price. b. Cost of Various Water Projects

Mr. Richard Svindland, Director of Engineering, discussed, in detail, the pros and cons of the following water source options available to CAW: Groundwater: Approximately $200 per AF. City of Sand City Desalination Plant ASR wells: About 1,300 AFA in theoretical water. Pacific Grove Recycled Water Project: Expected to yield approximately 400 AFA per year at about $2,500 per AF water. This does not include purchased water costs. Pacific Grove Satellite Recycled Water Treatment Project: Potential water rights issues over sewer water. MRWPCA GWR Project: Included in CAWs application. MPWSP: Includes all costs to date, including Surcharge 1, which is already collected. Approximately $5,000 per AF (actual capital costs). Monterey Recycled Water Project: Part of RUWAP to feed irrigation projects. Costs largely driven by piping to deliver water to the south and how does this fit in with current GWR project in regards to water rights and availability. Pacific Grove Storm Water Recycled Project: Is there any way to reduce costs? Open top vs. closed top reservoir? Dredging Los Padres Dam. Approximately $13,000 per AF as well as environmental concerns.

Please review CAWs presentation on Cost of Various Water Projects for additional details. i. Questions Some of the participants, including representatives of the Planning and Conservation League and Citizens for Public Water, took issue with CAWs demand inelasticity conclusion. Citizens for Public Water wanted to know if it was possible to extrapolate the numbers related to public relations activities on the conservation cost slide. CAW noted that the public relations costs are broken down in its conservation report. The Surfrider Foundations (Surfrider) representative asked if CAW calculated elasticity in each tier. CAW has not done so. Surfrider also asked if CAW was looking at external benefits of conservation program. CAW noted that it is currently developing a sustainable landscaping pilot project, with other parties, which considers such external benefits of conservation programs. Land Watch inquired about the Chesnutt study, which CAW agreed to make available in its supplemental testimony. The Monterey Peninsula Water Management District (MPWMD) stated that CAWs 14-month analysis does not reflect weather conditions as it only compares dry months to 2010 and 2011, during wet years.

In discussing non-revenue water, Eric Sabolsice, CAW Director of Operations for the Monterey County District, noted that even if CAWs current volume remains constant when overall production declines, the percentage would show an increase. In reality, the volume has decreased due to replacement of cast-iron pipeline and meter replacement. CAWs aggressive leak detection program (once every three years) and M-LOG program (acoustic leak detection) has contributed to overall reduction in non-revenue water. CAW continues to meet with DRA to focus on reducing non-revenue water through meter and infrastructure replacement. Prompted by further questions from both DWA and Land Watch, Mr. Sabolsice noted that CAW will continue working on reducing non-revenue water however every AF we save on nonrevenue water is going to cost more because CAW is going to hit the point of diminished returns. c. Costs continued . . . After lunch, Mr. Svindland continued his presentation on costs. He explained the assumptions used in determining the plant size. These included running the plant at 95% capacity (this is a supply replacement plant), paying back the Seaside Basin, and the ability to return approximately 8% of total desalination plant production to Salinas Valley. Mr. Svindland also provided the following updated demand forecasts for the Monterey County District: 15,296 AFY using a historical 5-yearr average plus Pebble Beach, Tourism Bounce back and Lots of record. Historical 5-year average demand: 13,290 AFY Maximum demand in last 5 years: 14,646 AFY. Minimum demand in last 5 years: 11,990 AFY. Additionally, Mr. Svindland discussed how plant size would be affected by the ground water replenishment (GWR) project and whether or not it was achievable. The presentation also discussed demand scenarios and how factors like tourism bounce back and additional development would affect this number. Mr. Svindland discussed the capital costs of the MPWSP, with and without the CAW-only facilities. The presentation also provided a comparison of the MPWSPs capital costs to the capital costs of past-proposed projects. Mr. Svindland also discussed the MPWSPs proposed annual O&M costs for MPWSP, electricity costs (included a discussion of the different options available), and a comparison of annual O&M Costs of past-proposed projects. Please review Mr. Svindlands presentation for additional details. Additional details about the Aquifer Storage and Recovery (ASR) costs are included in the presentations appendix. Mr. Svindland closed with a discussion on preconstruction costs highlighting that CAW is currently on track with all budget items (e.g. consultants, CPUC/ESA, Legal, expenses, etc.). i. Questions

There were several questions concerning the cost of electricity. DWA asked if CAW had considered solar. CAW responded noting that 7 MW of solar power is difficult to develop and that the electricity cost provided in the application, the PG&E tariff, is the worst-case scenario. Land Watch asked CAW to explain the tourism bounce back number. CAW responded noting that the number is estimated and is something that needs to be planned for. CAW added that it also planned for the approximately 380 AF it owes Pebble Beach in potable water credits. DRA noted that the land acquisition numbers are actually higher now than originally budgeted and were wondering when CAW would provide most up to date numbers and whether the new numbers would be more accurate. DRA also wanted to know if CAW would update its contingencies. CAW stated that it would provide updated costs in its Supplemental Testimony and as the project progressed. CAW noted that it is still working on other items and that it will make clear if there are more accurate figures. Jason Burnett, Mayor of Carmel, who represented the Monterey Peninsula Regional Water Authority (MPRWA) believes that there are various unknowns such as the success of ASR, GWR project, etc. and asked if CAW sized certain parts of plant somewhat larger in order to accommodate these contingencies. CAW responded by telling Mayor Burnett that it had sized the plant for the highest demand adding that the desalination plant can be scaled up in the future. d. GWR Presentation: Monterey Regional Water Pollution Control Agency (MRWPCA) Bob Holden & Keith Israel provided a presentation on GWR. The presentation noted that there were some changes since the testimony served in April, specifically to the cost of water per AF (described as $3,500 AF in the testimony, now $2,000-$3,000) and the project schedule (MRWPCA will have more firm numbers in the 4th quarter of 2014 to see if this is the project of choice). MRWPCA provided worst case and best-case projected costs for 10 and 12 months of operations. Power costs were also discussed ($0.18 per KW/H which includes, fees, etc.). MRWPCA also discussed additional revenues that it had already obtained (e.g. the State Revolving Fund, WaterSMART title 16) and other revenue streams that it was pursuing (Prop 84 grant). MRWPCA concluded by explaining the project cost challenges and that it would have greater clarity on the project by February 2013. MRWPCA is aiming to have the project online by December 2016. i. Questions DWA was concerned with MRWPCA Boards recent rejection of the budget. MRWPCA clarified that the Board rejected the budget because it wanted to ensure that water rights issues were resolved. MRWPCA is confident that the budget issue will be resolved most likely by next month.

There was again concern over power costs. DRA wanted to know why MRWPCAs cost of $0.18 KW/H was higher than CAWs. Rob MacLean of CAW explained that wastewater is susceptible to rain and that MRWPCA will likely have to pay for standby charges to significantly increase its draw up. MRWPCA added that it is also looking at landfill and solar power options. DWA asked CAW if it does its cost and O&M analysis by present or year-by-year future costs. CAW told DWA that when it bids for a project, it asks for O&M costs in the first year. Some of the participants asked about storage and distribution costs and if CAW had any plans to increase these components. CAW stated that it does not have any plans to increase distribution pipelines. e. Costs Impact of Contingency Plans Mr. Svindland went on to discuss cost impact of the various contingency plans that CAW had provided in an earlier filing. The presentation focused on brackish source water, facility siting, plant failure or periodic interruption, and outfall use for brine disposal. Mr. Svindland noted that many of the contingency plans can be completed within 4-year period. Mr. Svindland added that it would not be prudent to move forward with 5 different options through the CEQA process at the same time because it would be expensive and make it difficult to get approval for any of the options. CAW would only move forward with a contingency if it becomes apparent that the original plan is not feasible and cost-effective. i. Brackish Source Water

Mr. Svindland stated that he believes that CAW can begin work on the test slant well by the end of 2013 or beginning of 2014. If the slant wells are not possible, Ranney wells are possible contingency. Mr. Svindland discussed several other contingencies including a new open ocean intake at Cemex or relocating the slant wells to Portrero Rd. Subsequent options become generally more expensive, take longer to complete, and have other issues that need to be addressed. For more details on the contingencies please review Mr. Svindlands presentation. a. Questions Concerning Brackish Source Water Several parties had questions concerning the time horizon that CAW outlined in the various contingency plans. There was some concern that a few of the contingencies did not adequately plan for litigation-related delays. CAW stated that, from and engineering and permitting perspective, most contingencies do not have any timing issues. It is the litigation issues that may add additional time to the projects completion. The Public Trust Alliances (PTA) representative asked if CAWs proposed project had accounted for seawater rising and salt water intrusion. CAW assured the PTA that it sited the plant at a higher elevation for this very reason.

DWA asked several questions with regards to brackish source water. First, DWA wanted to know if CAW had looked at the cost impact of a 10-year delay to the project. CAW stated that it is hard to price the challenges it has going forward. CAW agreed to address the issue for DWA. Second, DWA wanted to know what CAW was doing in combination with the test well in order to evaluate the need for the Ranney well. CAW responded by saying that it would like to do some drilling to see up front which type of well would work best. Third, DWA asked CAW if it knew the remaining life span of the facilities outlined in a number of the contingencies. CAW stated that it did not have a clear answer to this question but could provide clarification. Fourth, DWA was also concerned that there were no permitting milestones. CAW told DWA that it would provide this information in its upcoming supplemental testimony. Fifth, DWA asked the extent of the interplay between the multiple contingencies. CAW noted that some of the contingencies share pipeline. Lastly, DWA noted that a number of items the ALJ asked for in the contingency plan filing were missing. CAW acknowledged that the Ranney wells contingency probably needed clarification and that it would address the missing items in its supplemental testimony. MPWMD asked if a separate NEPA process would be needed for the open ocean intake contingency. CAW stated that it had not yet determined if there were any NEPA issues but was looking into this. DRA asked if CAW had evaluated future O&M for the contingencies. CAW stated that it had only evaluated projected capital costs, not O&M costs, for the contingencies. ii. Facility Siting

CAW informed the parties that it had recently acquired 46 acres of land for the proposed facility site. For the Contingency Plan, it had looked at 8 other sites/alternatives. Please see Mr. Svindlands presentation for more details about the intake and desalination plants location. a. Facility Siting Questions DRA asked if CAW had planned for coastal erosion issues with regards to the intake wells. CAW stated that it planned for a 20-year life span for the intake wells and that it had planned for coastal erosion issues. CAW noted that Cemex is open to providing CAW with an easement in order to meet the coastal erosion issues. iii. Plant Failure or Periodic Interruption

CAW stated that the contingency plan did not focus greatly on these issues because it does not believe it is a significant issue because of the following reasons: Existing Carmel River rights provide 2-3 months of water supply and have historically met existing customer demands. As Carmel River ASR matures, CAW will achieve 1-2 months of supply.

Upon completion of ASR 5 & 6, an additional month of water supply will be in storage. Seaside Basin payback, as currently planned, is averaged over a 5year period and can be used to meet temporary interruptions. 1-2 days of storage exist within system. Seaside Basin payback could be used in an emergency. a. Questions on Plant Failure or Periodic Interruption

DWA asked if CAW had the necessary water rights. CAW stated that it has several remaining water rights on the Carmel River and that approximately 3,376 AF will always be available in the case of an emergency. iv. Outfall Use for Brine Disposal

CAW discussed its outfall contingency options. Please review Mr. Svindlands presentation for more detail about the various contingency options. CAW noted that the outfall would have a certain amount of capacity for wastewater. In wet months, the outfall would have capacity 96% of the time. The 4% where there was no capacity, the issue lasted for only 2 hours or less. CAW added that it was comfortable with storing brine until outfall capacity became available. a. Questions on Outfall Use for Brine Disposal MPRWA asked if there were any additional plans to increase outfall capacity. CAW noted that the existing outfall has ports that are currently plugged but which could be opened to accommodate more capacity. CAW also noted that it could use pumps to increase capacity.

Day 2 of Workshop: December 12, 2012 I. General Comments on Day 1

At the beginning of the second day, the parties were asked by DWA to provide any additional comments to day 1s presentation. DRA provided general comments on the length of the pipeline and contingencies and stated that it preferred that CAW use the shortest available routes for pipeline and urged CAW to negotiate with CalTrans in order to acquire the necessary rights or way. CAW stated that it would do so. Several parties provided commentary on the reduction in demand forecasts. The City of Pacific Grove asked if there was a basis for building smaller projects to take the load off of the MPWSP. CAW stated that it was ready to work with the City of Pacific Grove but that it did not want to divert resources from the MPWSP. DWA asked CAW to address several issues including O&M costs for operating the plant at 95% capacity. CAW stated that it had several contingencies to address the O&M costs necessary to operate the plant at 95% capacity. DWA also asked if desalination water would be available for growth. CAW stated that this depended on where demand went. CAW made clear that any further project delays could result in serious state and federal civil and criminal penalties, depending on the actions and circumstances resulting from such delay. Paying the fines and continuing Carmel River overdrafts was not an option. Sarah Leeper, Vice President Legal, Regulatory of CAW stated that although it would speculative to assign a number to the potential fines, there are very real legal risks. She stated that she was unaware of any decision where the Commission asked a regulated utility to disregard federal and state law. CAW and MPWMD noted that CAW could face a $1,000 per day fine for every point of diversion (CAW has approximately 20). This could result in fines of more than $365,000 per year. CAW noted, that while it was not clear as to this point, it was possible that it would have to pass along the cost of these fines to its ratepayers. While it would be difficult to quantify these fines, CAW agreed to provide additional detail on the legal risk/fines, etc. George Riley of Citizens for Public Water said that CAW is already paying NOAA, via advice letter, for Carmel River diversions. CAW clarified that it makes annual payments pursuant to a settlement agreement. The payments go to agencies doing work to support Carmel River ecosystem. Violation of the agreement could result in an enforcement action by NOAA. The agreement states that CAW must stop diversions either by 2016 or when its replacement supply comes online. DRA asked if CAW had talked with the State Water Resources Control Board (SWRCB) about the MPWSP delays. CAW stated that it had and, during those talks, emphasized that it had filed its application but could not control outside factors. The SWRCB chair recognized these risks and will take that into account. CAW must show the SWRCB progress. DRA also asked

about the status of all the proposed projects necessary permits. CAW stated that it needed to have a certified EIR before it would seek permits for the desalination plant. The only permit CAW is seeking now is the slant well permit, which does not require the certified EIR. CAW agreed to provide the parties with a status on the permits. II. CAW Financial Modeling

Jeffrey T. Linam, Vice President of Finance and David P. Stephenson, Director of Rates, began the presentation on CAWs financial modeling. CAW clarified that while it refers to the solution as the MPWSP, CAW has applied for a utility rate base investment. From that stand point; the MPWSP is no different than other utility rate base investments (e.g. meter retrofit project in Sacramento District). CAW discussed the models key assumptions, such as eligibility for SRF loans, a customer surcharge, and utilization of short-term debt. CAW also discussed the following items: Strategy to limit revenue requirement. o A surcharge, like the one approved in the CWP to avoid rate shock, should be approved for the MPWSP. It will provide $100 million for construction costs and provides funds as the project is developed. The surcharge is not part of rate base and according to the State Board of Equalization is exempt from property taxes. o Capital recovery for lots of record: Growth should pay for growth. Size of desalination project hasnt looked at the possible growth but will consider increasing size if growth is willing to pay for growth. MPWMD amount, $28,300,000 for connection fee. Used for reference. Capital and Financing Summary for Desalination Plant. o Use of SRF reduces revenue requirement. Sources and Uses of Cash. Annual Customer Surcharge. Projected Impact to Monterey Water bills:

For more detail, please reference the financial modeling presentation. a. Questions on Financial Modeling DWA asked if CAW is going to update the presentation to take into account the new timeline. CAW stated that it would. DWA also asked why CAW was still considering the 5.4 MGD desalination plant even though its needs had increased. CAW stated that it is possible to increase the production of the 5.4 MGD plant. CAW noted that its contingencies might cover a production increase but that cost increases may be necessary. CAW stated that it would address this issue in its supplemental testimony. DWA also asked if CAW had looked at any other financing options. CAW replied stating that it had proposed the best cost option at this point in time and noted that this is the same financing that the Commission has used in other proceedings.

The use of long-term debt as a contingency to SRF was discussed at the previous Technical Workshop. CAW added that it has taken a balanced approach its application and has tried to limit the impact to its customers. Mayor Burnett pointed out that MPRWA has offered up public financing to CAW and that the Commission should urge CAW to accept this financing. CAW noted that it has considered a number of options but is awaiting a more detailed proposal from MPRWA and reiterated that its proposal balances the ratepayer benefits while preserving the financial viability of the utility. III. Compliance Filing and Present Financial Model

Mr. Brian LaGrand provided the workshop participants with instruction on how to use the financial model. CAW started developing the model in February 2012. CAW also told the participants that they would need to use Excel 2007 or higher and that the model is iterative. CAW also agrees to rework the numbers for the model by the end of the year. CAW will work with DWA and others to consider a new plant size and other factors that are feasible. a. Questions on the Financial Model The majority of the questions related to this portion of the presentation answer technical aspects of the model. CAW offered to provide the model and assist the parties with any additional questions that they may have.


Key Take-Aways and Items DWA would like CAW to address in Supplemental Testimony. Conservation Issues: o Look at the impact of external factors on elasticity. o Look at the cost of social injury (environmental, etc.). o Determine cost elasticity in different tier. Project Costs: o More updated cost for all components. o Net present value analysis. o Clarification of electricity costs. o Contingency factors. To the extent that they can be fine tuned, should be addressed. o Impact on project capacity. Cost Impacts of Contingencies o Source Water Mitigation costs Look at options 6 & 7 and discuss the remaining life span of these facilities. Timelines, permitting, cost estimates, and financial impacts. Consideration of O&M Costs. Is it possible to reduce pipeline length in the contingency plans? Discuss the impact of not meeting the CDO deadline. Please address rationing. Please address if there are any advice letters concerning Carmel River-related penalties (can address offline). The status of permits Parallel processing of permits Financial Modeling: o Project Financing: Please address additional public financing options. Cover financing contingency options.


Update slides and testimony to reflect the new project schedule and plant capacity. Timing and impact of recovery of cost. Please address the disposition of surcharge 1 and interaction with surcharge 2. CAW agreed to assist intervenors with the model and revise the model to include the following: NPV, new sizing and related expenses.