Regular Agenda Item No.

14D
Administrative Report
TO:
FROM:
MEETING DATE:
SUBJECT:
RECOMMENDATION
300 Forest Avenue, Pacific Grove, California 93950
Honorable Mayor and Members of the City Council
Thomas Frutchey, City Manager
June 20, 2012
Agreement initiating a relationship with Nader Agha and Moss
Landing Commercial Park, LLC. {MLCP} to develop a desalinated
water project able to meet the needs of Pacific Grove and the
Monterey Peninsula
This action does not constitute a "project" as defined by the
California Environmental Quality Act (CEQA) guidelines section
15378.
1. Receive an update on the agreement to initiate and provide funding to establish a
public/private partner relationship between Nader Agha/Moss Landing Commercial Park, LLC
and the City of Pacific Grove.
2. Decline taking action on the agreement at this time. {If Council disagrees, it has the ability to
take one or more alternative actions, including approving the agreement.)
DISCUSSION
On April18; 2012; the Council adopted Resolution No. 12-027 directing City staff to prepare an
agreement to define a relationship between Mr. Nader Agha I Desai America and the City
related to development, construction, and operation of a desalinization water supply project
(the People's Project) to provide water and benefits to the City and the Monterey Peninsula.
The Council directed that the relationship progress in two stages, with the first stage to be the
execution of an agreement with Mr. Agha establishing the parameters and payment provisions
for the completion of the future agreement related to the development of a water supply
project. The second stage is the future agreement, as contemplated by Resolution No. 12-027,
to provide all details of the partnership and its goals (the "Desai America Agreement").
On April 23, California American Water Company (Cal-Am) filed its revised project proposal to
the California Public Utilities Commission (CPUC), Application 12-04-019. In that proposal, Cal-
Am commits to creating water from its north Marina desal project and buying groundwater
recharge from the Monterey Regional Water Pollution Control Agency (PCA} and seasonal
storage water from the Monterey Peninsula Water Management District (MPWMD}. Cal-Am's
proposal makes no provision to buy water from the People's Desai Project, even though the
project proponents estimate that water from the People's Project will be available at
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significantly lower cost. To qualify for the bond funding necessary for the People's Project, the
City and Mr. Agha must ensure that the CPUC directs Cal-Am to purchase the water produced
by the People's Project for conveyance to the ratepayers. It is problemmatic whether or not
Cal-Am can receive such authorization as a result of its filing in A.12-04-019.
At the May 16, 2012 Council meeting, the Council:
1. Received an update on the agreement to initiate and provide funding to establish a
public/private partner relationship between Nader Agha/Moss Landing Commercial
Park, LLC and the City of Pacific Grove and accepted the proposed language, with the
exception of Section 15, Indemnification.
2. Directed staff to negotiate further regarding Section Indemnification, of the
Agreement to ensure the City is adequately protected.
3. Directed staff to formally seek through the JPA process additional cities to join the
Agreement, then returning to Council with all results.
During the several weeks since the Council's action, the City and Mr. Agha's team have
completed their negotiations on the Agreement, specifically Section 15, Indemnification, with
the goal of ensuring the City is adequately protected. Mr. Agha has signed the latest version of
the agreement (see Attachment 1). In addition, the Mayor and City Manager have discussed
with other members of the JPA their interest in joining us in this effort. Mayors of the other
five cities have all stated that they are not interested in aligning with this project or either of
the other projects but, instead, are committed to waiting for the results of the outside technical
evaluation.
Other events with impacts on this potential partnership have transpired, as well, including,
among others:
! The Water JPA TAC has proceeded with its detailed review of the three proposals.
: Mr. Agha and Mr. Schroeder indicated to the Water JPA TAC on June 4, and re-iterated
in a letter to the editor of the Herald, on June 12 (Attachment 2} that the proponents of
the Peoploe Desai Project believe members of the TAC have conflicts of interest or are
otherwise biased against the People's Desai Project. As a result, they stated that they
are withdrawing the People's Project from further consideration by the TAC and will
deal only with the full JPA Board.
! The JPA Board approved an RFP for an outside technical evaluation of the proposals.
Responses to the RFP are due back on in July.
! The JPA Board formally acknowledged that it prefers that the Water Management
District be the public agency involved in the desal project, not the 6 cities, either
individually or as a group.
! The City submitted comments to the CPUC Administrative Law Judge, both on our own
and as part of the JPA (Attachment 3).
! The CPUC Administrative Law Judge established an extremely aggressive set of
milestones and time lines, in an effort to ensure that water is available when needed, on
January 1, 2017 {Attachment 4).
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Administrative Report
These events, and the additional information that has come to light over the past several
weeks, have been telling.
The key question for the City is whether entering into this partnership with Mr. Agha/Moss
Landing Commercial Park, LLC is likely to be of net benefit or net cost to the citizens of Pacific
Grove. Mr. Agha has made a generous offer to the City. If the People's Project is successful,
water costs for Pacific Grove ratepayers may be significantly lower than under the other two
proposed projects. In addition, the City would potentially gain revenues that could cover some
of the City's administrative costs.
However, as stewards of the public's treasury, our primary guiding principle must be minimizing
the risk of harm, by minimizing the likelihood that our actions could put the General Fund at
risk, when there is an alternative action that is less risky.
Peering into the future is always uncertain, but the City's involvement in the People's Project
would appear to have a low likelihood of positive benefit, and a high risk that the costs would
exceed the benefits, for the following seven reasons:
1. The CPUC and other regulatory agencies are not likely to approve Mr. Agha's project (or
either of the other two projects) as currently conceived.
2. Cal-Am's application before the CPUC does not to provide a proper means by which Cal-
Am will be authorized to buy water from the People's Project to convey to ratepayers.
3. Mr. Agha and the City have markedly different goals, and the proposed partnership is ill
suited to assist either party in reaching its goals.
4. Given that a public partner does not appear necessary, the City has nothing of value to
offer Mr. Agha, but does impose significant restrictions on his freedom to act.
5. This project is way beyond the City's capabilities, and would impose unacceptable
opportunity costs on the other responsibilities and opportunities we have in the coming
years.
6. There are significant financial and legal risks of the City's involvement in this project.
7. The resources Mr. Agha is willing and able to commit are not likely to be sufficient to
see this project through to completion. Thus, Mr. Agha will likely need at least one
other partner, which will complicate an already challenged relationship even further.
Each of these is examined below.
1. The CPUC and other regulatory agencies are not likely to approve Mr. Agha's project (or
either of the other two projects) as currently conceived. The proponents of the three projects
have submitted detailed responses to the TAC's 50+ questions. The TAC has now finished a
preliminary evaluation of those responses. As would be expected with a quite complex project,
involving potential environmental impacts of great significance, and in an area as litigious as
water rights, serious potential issues are evident with all three projects. None of the projects
appears without a major flaw. As the exact nature of the issues clearly vary significantly from
proposal to proposal, it is now becoming reasonable to project that the peninsula may end up
with a project that combines elements of all three proposals
Regular Agenda Item No. 14D
Administrative Report
2. application CPUC not to a proper means by which
Am will be authorized to buy water from the People's Project to convey to ratepayers. At the
June 6, 2012 Prehearing Scoping Conference, AU Weatherford clarified that the hearings and
testimony for Cal-Am's Application 12-04-019 will not address project alternatives, and will
instead focus on whether that proposal is cost-effective or can be achieved in a more cost-
effective manner. As such, it is not likely that evidence pertaining to Mr. Agha's project will be
received by the CPUC, and it is not likely that the proceeding can authorize Cal-Am to buy water
from that project. This step is essential to ensure that the People's Project can be funded, and
for the City to ensure continued compliance with its franchise agreement with Cal-Am.
3. Mr.
suited to assist either party in reaching its goals. Mr. Agha has stated that his two goals for
partnering with the City are to:
1. Sell the City the land at Moss Landing where the plant will be constructed.
2. Contract with the City to design-build the desal plant, based on the technology Mr. Agha
and his partners at Rodi Systems have developed.
There is a high likelihood that, if the City becomes involved in this project, it will not be able to
meet either of Mr. Agha's objectives. As to the land, several factors would tend to make it
preferable for the City to seek to lease the land, not buy it. Even though Mr. Agha has spent
significant sums cleaning his site of contamination, before the City could purchase the property,
a complete assessment of environmental hazards and any remediation costs would need to be
performed, with unambiguous assignment of responsibility. In the event significant
contamination were to be found, any costs to remediate could easily exceed the value of the
underlying property. If the City were to hold an ownership interest, it would likely hold joint
and several liabilities for remediation. This means that the City could bear sole responsibility
for environmental remediation costs in the event its partners were unable to pay.
As to the desa! plant design/build, given the requirements of the City's purchasing processes;
and likely bond covenants, we will be issuing a request for proposals (RFP) to identify the
design/build contractor. There is no way to predict at this point whether Rodi Systems would
be the successful proposer. (There would also be at least the appearance of collusion if the City
were to award the design/build contract to Rodi Systems, given that the City would be
perceived as a partner of Mr. Agha and Mr. Agha has interests in Rodi Systems.)
If the CPUC's stated position that a public partner for a desal project in Monterey County is not
necessary is validated over the coming months, Mr. Agha is likely to become increasingly
frustrated at having to adhere to the process requirements that having a public partner such as
the City are likely to impose on him. Having a public partner in that scenario imposes significant
costs but yields no real benefits.
The goals of the City-to ensure that replacement water is available by January 1, 2017-would
appear to be better served by investing the City's limited resources in other ways, such as
heightened involvement in the Water JPA. If the City continues to be a proponent of just one of
the three competing projects, the City will be violating one of the key tenets of membership on
Regular Agenda Item No. 14D
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the JPA, and will lose its voice, both on the JPA Board but in helping shape the JPA's role as an
intervener with the CPU C.
4. Given that a puulic partner not appear necessary, the City little if anything of
value to offer Mr. Agha, but does impose significant restrictions on his freedom to act. There
are already examples of this. Mr. Agha secured the commitment of a consulting firm to
conduct the upcoming CEQA analysis for a relatively low price. The City, however, will have to
issue an RFP and award the contract in full conformance with our purchasing ordinances. That
is likely to both delay the timing of the RFP and increase the overall costs to Mr. Agha. Thus,
when this is combined with the preceding reasons, it would appear that the relationship has a
high likelihood of soon souring, from Mr. Agha's perspective.
5. project is way beyond the City's capabilities, and would impose unacceptable
opportunity costs on the other responsibilities and opportunities we have in the coming
years. We are not currently in the water business; we have no engineers on staff; our City
Attorney, who is an expert in water, is not able to fully participate, given the perception of a
conflict of interest with his duties as General Counsel to the Water District; given all of the
other projects of importance to the City, and our structural financial deficit, we have no
resources to expend on this project.
The recent Sand City experience is instructive. The San City project was a $12M project
(compared to the approximately $100M Peoples' Project. In spite of its small size, the Sand City
project consumed, on average, over 20% of the City Manager's time and over $100,000 in legal
costs, without any suits even being filed to stop the project. The project almost had to be shut
down, when California's bond rating was lowered. The CPUC rejected Cal-Am's proposal to
undertake operational costs for the Sand City project, and has not finalized its review of that
effort.
Even though Mr. Agha has committed to pay for the staff time involved, there is no way to
make up for the time lost on other projects. There are numerous high-priority projects-
including the recently requested fire analysis, needed improvements in Police cost-
effectiveness, continued progress on resolving the retirement benefits issue, among others-as
well as overall management of the City, that will be sacrificed if this project proceeds. A
significant portion of the Council's time would also need to be dedicated to this effort.
5. There are significant financial and legal risks of the City's involvement in this project.
One of the primary underlying principles required by the Council in the formation of the
relationship with Mr. Agha is that the City's General Fund and overall fiscal health not be placed
at any risk. Two specific areas of interest were negotiated over the past several weeks to
ensure consistency with that principle:
Assurance that the $600,000 Mr. Agha is committing to the development of the People
Project's EIR, permit applications, and other efforts will be available when needed; and
Regular Agenda Item No. 14D
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Protection of the City in the event of lawsuits, regulatory requirements of the CPUC,
Coastal Commission, or other permitting bodies, or any other unintended sources of
expenses resulting from the City's participation in the Project.
However, in spite of this, the attorney for PARSAC, our risk management consortium, has noted
that even the most comprehensive assurance that Mr. Agha intends to indemnify and defend
the City from risk includes the possible risk that his resources will not be sufficient or available
to meet this objective. The City may not avoid joint and several liability to third parties or the
public at large. The City, alone, will be responsible for these expenses if insufficient resources
exist to fund the indemnity provisions. Further, as seen in the three-party agreements between
Cal-Am, the Marina Coast Water District, and the Monterey County Water Resources Agency
for the now-defunct Regional Desai/ Coastal Water Project, an iron clad set of indemnity and
reimbursement agreements are of no avail when one party contends that the contract itself is
void.
Paragraph 16 of the draft Agreement proposes that the Parties to the agreement agree not to
sue each other. That provision, alone, calls into question the enforceability of any of the
agreement's payment and indemnification provisions.
6. The resources Mr. Agha is willing and able to commit are not likely to be sufficient to see
this project through to completion. Thus, Mr. Agha will likely need another partner, which
will complicate an already challenged relationship even further. The attorneys we
interviewed to represent us at the CPUC indicated that, even without litigation, administrative
costs for this project will be considerable. They believe that the environmental review process
may cost from $750,000 to $1,000,000, or more. They also believe that legal and technical
expenses for the CPUC processes may exceed $1,000,000 due to the large number of
participants, and the anticipated adversarial positions of the parties. Thus, significantly greater
venture capita! wi!! be needed before the due diligence the City must undertake as a public
agency could be completed.
CONCLUSION
The Council subcommittee has consistently championed this project and the partnership. As
City Manager, however, my perspective, and the factors that I must consider, are inherently
different. In general, as the chief executive officer of the City, a city manager is required to
view the City's affairs as societal and economic problems to be solved. The City works best
when it shepherds its resources in order to be most cost-effective. The City can make the best
use of its limited resources by addressing those problems that it can solve. The City's power
and influence is based on the discretionary resources the City has at its disposal.
As policy-makers, Council members can have a very different perspective. A Councilmember's
perspective can tend to view the City's affairs as interests to be reconciled so that agreement
can be reached on how to move forward. From this perspective, the City works best when it
listens to the various groups demanding City actions to solve their problems. The City's power
Regular Agenda Item No. 14D
Administrative Report
and influence is based on the citizens whose needs have been met and believe that the City can
do so again in the future.
On most issues, these two perspectives can be reconciled. In this case, we have not found a
way to to do so. I fully respect the subcommittee's perspective and commitment. However, as
City Manager, I cannot recommend that the City become a partner in this project; the downside
risks far outweigh the possible benefits that cannot be achieved by other means. It is my
professional opinion that the City's goals can be better achieved and our citizens better served
by not proceeding with this agreement at this time, but instead, continuing as a full
participating partner in the Water JPA.
FISCAl IMPACT
Mr. Agha has committed, on behalf of the People's Project, to pay all City costs involved, prior
to the activity causing the expense. The intent is that no activity will be undertaken that
requires a financial contribution from the City before overall Project financing is obtained. As
noted above, indemnity and reimbursement agreements cannot ensure that avoid all risks to
the City will be avoided. Accordingly, it must be assumed that the City will accept a significant
risk to its fiscal resources if it enters into the proposed agreement.
ATTACHMENTS
1. Draft Agreement, signed by Mr. Agha, dated June 1, 2012
2. Letter to Editor, Monterey County Herald, June 12, 2012
3. City Comments to CPUC Administrative Law Judge, June 4, 2012
4. Schedule of Proceedings Proposed by CPUC Administrative Law Judge, June 6, 2012
RESPECTFULLY SUBMITTED:
Thomas Frutchey
City Manager
Regular Agenda Item No. 14D
Attachment 1
FORMATION AGREEMENT BETWEEN
THE CITY OF PACIFIC GROVE
AND
MOSS LANDING COMMERCIAL PARK, LLC.
FINDINGS
1. This Agreement (Formation Agreement) is made by and between the City of Pacific
Grove (City) and Moss Landing Comtnercial Park, LLC. (MLCP). City, Nader Agha and
MLCP are collectively referred to as the Parties. City is a Charter City and makes this Formation
Agreement as a municipal corporation, in its official capacity. MLCP is a Limited Liability
Company, wholly owned by HMBY, LP, a California limited partnership of which Nader T. Agha
is the sole General Partner.
2. On April 18, 2012 the Pacific Grove City Council adopted Resolution No. 12-027
directing City staff to prepare a future agreement to define a relationship between Desai America
and the City related to development, construction, and operation of a desalinization water supply
project to provide water and benefits to the City and the Monterey Peninsula. The future
agreement to be prepared, as contemplated by in Resolution No. 12-027, is referenced as the
"Desai Agreement." The Desal Agreement is not the Formation Agreement.
3. Desai America is not a Party to this Formation Agreement. It is contetnplated that the
status of Desai A1nerica shall be defined in the De sal Agreement, and that De sal An1erica shall
become a party to the De sal Agreement, in addition to the Parties to this Formation Agreement.
4. California-American Water Con1pany (Cal-A.m) is an investor-owned water utility
regulated by the California Public Utilities Commission (CPUC) that serves retail customers in
the City and other portions of the Monterey Peninsula. Cal-Am is not a Party to this Formation
Agreement, and is not contemplated to be a party to the Desai Agreement. The City has granted
Cal-Am an exclusive franchise to deliver potable water to custon1ers within the City.
5. Water is necessary for the health and well being of all citizens, and the economic viability
of the City. There is a need to formalize the relationship between the City, MLCP and Desai
America.
6. The Desai Agreement, in binding terms, shall clearly identify all pmiies and define their
roles and responsibilities in relation to a desalination water supply project that at titnes has been
referred to as the "Peoples' Water Project" or "Project," as set forth in Attachment B, The
Peoples Moss Landing Water Desai Project, latest version. It is contemplated that this water
supply Project will be located on real property in Moss Landing, California currently owned by
MLCP. Specifically this property is located at 7697 Highway 1, Moss Lm1ding, California
95039. The Desai Agreement shall clarify the relationship between Desai America, the City and
MLCP, and the role of Desal America. The Desai Agreen1ent shall define the purpose and scope
of the Peoples' Water Project, and address issues pertaining to development, construction,
operation, and maintenance of that desalinization water supply project to provide water and
benefit to the City and the Monterey Peninsula. The Desai Agreement shall address issues
FORMATION AGREEMENT BETWEEN THE CITY OF PACif-IC CROVE AND MOSS LANDIN() COMMERCii\L Pt\RK. LLC
PAGE 1 OF 9
Regular Agenda Item No. 14D
Attachment 1
related to property acquisition and use, public and private financing, and governmental approvals
for all aspects of the Project. The Desai Agreement shall address issues related to all processes
that apply to Project approval, including (but not limited to) proceedings before the California
Coastal Commission, the State Water Resources Control Board (SWRCB), the CPUC, the
County of Monterey, the Monterey County Water Resources Agency, the Monterey Peninsula
Water Management District and the City. The Desai Agreen1ent shall address any review process
that may apply under the California Environmental Quality Act (CEQA) or National
Environmental Quality Act (NEPA). The Desai Agreement shall address means by which water
supply from the Peoples' Water Project may be wheeled through existing and new utility systems
to customers and end users consistent with all terms of the Cal-Am exclusive franchise to deliver
potable water within the City.
7. The Parties anticipate that tern1s addressing the following non-exhaustive list of topics
will be required for the Desal Agreement: financial provisions, form of participating entities
(partnership, joint venture, JPA, or other), roles and coordination with others, including cities and
Cal-Am, CPUC approvals, regulatory con1pliance, franchise compliance, agreement with Seaside
Basin Watermaster, project feasibility , brine disposal, identification of property to be purchased,
identification of necessary infrastructure in1provements, land appraisal and acquisition terms,
identification of any contaminated property and environmental remediation requirements.
representations and warranties, litigation, cooperation in litigation, force majeure, third-party
beneficiaries, ownership of documents, explanations of methods, dispute resolution, assignment,
default, cure and remedies, atton1eys fees, and notices
8. The Desai Agreement may include non-binding preliminary terms of agreen1ent, to assist
in focusing the development of a water supply project responsive to the capabilities and needs of
the Parties' to the Desai Agreement. The Desal Agree1nent rnay further include preliminary
concepts that may be included in one or more future agreements by and among son1e or all of the
Parties.
9. Negotiation and development of the Desai Agreement will require the City to expend
time, effort, and expense, including retention of expert consultants and legal counsel; such costs
shall be incurred only to the extent they are reimbursed.
10. Approval of the De sal Agreement shall require discretionary approval of the City
Coundl, and this Formation Agreement shall not be construed to cmnpel the City to enter into or
approve the Desal Agreement.
11. No Party intends by this Formation Agreement to con1n1it itselL or the other Parties, to a
particular course of action, other than as set forth in Finding 2 above. The Parties reserve their
discretion to evaluate projects or future agreetnents, including but not limited to the Desai
Agreement, and to determine the feasibility or viability of any project i1npacts, alternatives and
mitigation measures, including but not limited to deciding to not proceed with the Peoples' Water
Project or any other project.
12. The Parties re-confirm that neither this Project. nor any project can proceed unless and
until the Parties have negotiated, e x e c u t e d ~ and delivered a mutually acceptable De sal
FORMATION AGREEMENT BETWEEN THE CITY OF PACIFIC GROVE AND MOSS LANDING COMMERCIAL PARK, LLC
PAGE 2 OF 9
Regular Agenda Item No. 14D
Attachment 1
Agreement. Any public agency action on the Desal Agreement shall be performed in compliance
with CEQA and any other necessary public review and hearing processes, and subject to all
applicable governmental approvals. The Parties intend by this Formation Agreement to inform
and focus the work necessary to develop and review the Desai Agreement, and the proposed
People's Water Project, not to pre-determine what that or any other project may be.
13. City participation is contingent upon the financial support provided by MLCP, and shall
be suspended if revenue contributions by MLCP are not timely received. If City suspends its
efforts, for any reason, MLCP shall nonetheless ensure the City is paid for all costs of time,
effort, or expense it incurred in reliance upon this F 01mation Agreement.
14. This Formation Agreement shall memorialize the responsibilities of Parties to the
Formation Agreement, and aid in the preparation and review of the Desai Agreement.
AGREEMENT
1. Findings. The foregoing Findings are true and correct and are integrated into this
Formation Agreement as if each was set forth fully herein.
2. Compliance with Law. Each Party shall abide by all laws, charter, municipal code,
ordinances, and regulations of the United States, State of California, City, and of any other public
entity.
3. Lead Roles. The City shall have lead responsibility to draft the Desal Agreetnent, subject
to review and consultation of MLCP and De sal America. Each Party will negotiate in good faith
with the other Party to develop a Desal Agreement acceptable to both Parties, which Agreement
will be consistent with CEQA. The Parties' goal is that such agreement will be con1plete and
fully executed in a timefrmne to enable the Project to be operational such that water can be made
available to the community on a schedule as required by the SWRCB.
4. CEQA. The Desal Agreetnent shall provide that the City shall be lead agency for the
purposes of CEQA compliance, and that MLCP shall provide the necessary financial support for
planning and CEQA compliance activities. In the event a feasible project is identified, the City
will act as lead agency pursuant to CEQA, and will prepare or have prepared an environmental
document pursuant to CEQA to evaluate the environn1ental i1npacts of the proposed Project. If
the City chooses to implement the Project, the City will adopt or certify m1 environmental
document including any necessary supplements or addenda thereto (collectively CEQA
Documents)- that in its judgment complies with CEQA. The City will use funding provided by
MLCP for this effort.
5. Cooperation. All Parties shall cooperate and ti1nely respond to any request for
information or records. MLCP shall titnely provide City with all relevant data and studies in its
possession without charge. All Parties commit themselves to negotiate in good faith respecting
the Desal Agreement, and to cooperate in all investigations to deten11ine if the Project it supp011s
is viable. The City shall identify and work with other public agencies and private entities with
experience or expertise in water supply projects of this type, or that may otherwise assist in
bringing such a project to completion.
6. Retained Discretion. City expressly retains discretion as to whether it will, or will not,
enter into the Desal Agreement, or any other agreement, and on what tern1s. Nothing in this
FORMATION AGREEMENT BETWEEN THE CITY OF PACIFIC GROVE AND MOSS LANDING COMMERCIAL PARK, LLC
PAGE 3 OF 9
Regular Agenda Item No. 14D
Attachment 1
Formation Agreement shall be construed as limiting City's obligation to consider any and all
alternatives, including the "no project" alternative, and any and all mitigation measures, and to
make the requisite findings, in the above-referenced CEQA process.
7. Limit on City. City shall spend no time or effori on under this Fonnation Agreement
except to the extent that MLCP has made an advance deposit of $50,000 to cover the cost of such
effort, and those funds have actually been actually received for the exclusive benefit of the City.
City shall prepare and subtnit a full accounting of all expenditures to MLCP and, after the first
$50,000, shall prepare a listing of expenditures anticipated for each successive installment.
8. Payment of Costs and Expenses. MLCP shall provide full and complete funding to
City, and replenish funds paid to City pursuant to Paragraph 7, above, to pay all of City's actual
costs incurred prior to the issuance of bonds to develop, review, and obtain City Council
approval of the Desai Agreement and to effectuate the completion of any water Project proposed
in that Agreement. The Parties currently estimate costs of the De sal Agreement and other
preliminary activities to not exceed $50,000, and to incur these costs prior to June 30, 2012, but
this estimate is subject to change, and the City may incur costs after that date. To the extent this
initial deposit amount is expended by the City prior to the Desai Agreement being duly executed
by the Parties, MLCP shall advance additional an1ounts as requested by City, not to exceed an
additional $50,000. MLCP shall advance this additional amount within fifteen (15) days of
notice from the City requesting that additional amount, subject to the City presenting to MLCP a
list that shows the amount of all monies previously paid, and identifies each payee. Should this
amount not be sufficient, MLCP shall advance a third amount as requested by City, in the amount
of $50,000, upon City subtnitting full accounting for the second increment. No incretnent shall
exceed $50,000 prior to execution of the Desai Agreement. The intent all payments
throughout shall be to ensure the City has enough funds on deposit to cover all costs as they are
incurred and pay all bills as they arise. Upon presentation to MLCP by City of estirnates of
upcoming expenditures, MLCP shall remit to City payment in full within 15 calendar days.
Expenses to be reimbursed by MLCP shall include, but shall not be iimited to, City staff time and
costs, City Attorney tin1e and costs of retained special counseL costs of public notices and
meetings, costs of consultants retained by City, and other actual costs of the City in executing the
Desai Agreement, administering the Enviromnental lin pact Report referenced in Section
issuing the bonds, and completing the Project. Costs may include any appearance the City
deems reasonable before an agency referenced in Finding 6, above. City staff time shall be
charged, and reimbursed by MLCP, at the rates shown in Attach1nent A. Any obligation to pay
survives tennination of this Fonnation Agreement until such payment is made in full. If, and
when, $100,000 has been expended under this provision, the Parties shall n1eet to evaluate
the costs incurred to date and the anticipated scope of future costs in pursuit the
Agreement. Absent written amendment, MLCP shall not be obligated to authorize
expenses exceeding $150,000 under this paragraph.
9. Payments for Compliance with CEQA. In addition to the payments required pursuant
to Section 8, MLCP agrees to advance the City an amount equal to the outside expenses it may
incur associated with compliance with C E Q A ~ including the preparation of an Environn1ental
Impact Report, up to a total of $450,000. Such payments shall be n1ade as follows: 1)
shall deposit $125,000 into a segregated account for the benefit of the City pursuant to this
provision upon City's execution of a binding contract with an EIR consultant selected to
FORMATION AGREEMENT BETWEEN THE CITY OF PACIFIC GROVE AND MOSS LANDING COMMERCIAL PARK, LLC
PAGE 4 OF 9
Regular Agenda Item No. 14D
Attachment 1
complete the environmental review under this agreement; 2) Thereafter, MLCP shaH
deposit additional funds into the account to cover actual and anticipated City expenses
incurred in CEQA compliance. Such funds shall be deposited within 15 days of the earlier
of a) receipt of an itemized billing for City expenses incurred in CEQA compliance or b)
Upon written request of the City, at the times and in the amounts identified by the selected
CEQA consultant in a reasonably anticipated timeline of upcoming CEQA compliance
expenses. 3) The City shall be authorized to draw upon funds from the segregated account
only to pay itemized outside expenses for CEQA compliance pursuant to this provision
not for any other purpose.
10. Total MLCP Obligation and Liabilities. Total obligations made pursuant to Sections 8
and 9 of this Agreement shall not exceed $600,000, without the Parties meeting and agreeing to
increase such obligations. Total liabilities for MLCP, except for liabilities under 15 and
17 of this Agreement, shall not exceed $600,000 without the advance written consent of MLCP,
which consent shall not unreasonably be withheld. If City determines that its efforts, for any
reason, require funding beyond that for which MLCP is willing or able to pay, the City shall
immediately suspend all effort required by this Formation Agreement.
11. Inclusion in Bonds or Other Financing. It is agreed that all of the 1noney advanced to
the City pursuant to this Agreement, including as set forth in paragraphs 7, 8, and 9 above.
shall be included in the mnount of bonds or other financing the City obtains for this project and
shall be repaid, without interest, to MLCP when the financing money is received by the City.
12. Involvement of Other Cities. In the event one or more cities on the Monterey Peninsula
decides to join the City in executing the agreement of the City to purchase the property and build
the desalination plant, the City 1nay use the above funds in collaboration with such other city or
cities.
13. Late Performance. Tin1e is of the essence to this F orn1ation Agreetnent. In the event
tv1LCP should fail to make timely or satisfactory effort within 30 days of the date any effort is
due, and such delay is due to circun1stances within the control of MLCP and not due to actions or
inactions of City, City n1ay in1pose a ten percent penalty on any effort expends in relation to the
delayed task. Should MLCP fail to make any payment upon the date it is due in accord with
Paragraph 8, MLCP shall in addition to the payment that is due, pay an additional twenty percent
of the cost or expense which would otherwise be payable under this Agreen1ent as liquidated
damages for the untimely payment required by this Agreement. MLCP shall be deemed to waive
any claim for relief of this requirement by reason of its failure to perfom1 in a timely fashion.
14. Retained Costs. MLCP shall bear its own costs with respect to all efforts in furtherance
ofthis Formation Agreement, and shall not be eligible to clain1 or receive payn1ent from City
pursuant to this Forn1ation Agreen1ent, under any circumstance.
15. Indemnification. MLCP and Nader Agha, personally, agree to jointly
indemnify, defend, and hold City, its Council, officers, agents, and entployees free and
harmless from any 3rd party claims, demands, losses, costs, expenses, obligations, liabilities,
damages, :recoveries, and deficiencies, including but not limited to attorney's fees and costs,
property damage, and bodily injury that such may incur as a :result of a material breach by
MLCP of its obligations under this Agreement.
FORMATION AGREEMENT BETWEEN THE CITY OF PACIFIC GROVE AND MOSS LANDING COMMERCIAL PARK, LLC
PAGE 5 OF 9
Regular Agenda Item No. 14D
Attachment 1
MLCP and Nader Agha further agree to indemnify, defend, and hold City, its Council,
officers, agents, and employees free and harmless from 3rd party claims, demands, losses,
costs, expenses, obligations, liabilities, damages, recoveries, and deficiencies, including
attorney's fees and costs, resulting from such 3rd party's property damage or bodily injury
that result from alleged negligence by MLCP in the performance of this Agreement.
16. Insurance. MLCP agrees to maintain an ISO commercial general liability insurance
policy in the amount of $2,000,000 covering its operations outlined under this agreement
with the City. The City of Pacific Grove will be named as an additional insured. Such
policy shall require that an evidence of insurance be provided with 30 days advance written
notice of material change or cancellation to the City of Pacific Grove. MLCP will require
it's sub-contractors to provide the same coverage including naming CITY as an additional
insured. MLCP shall provide City with a certificate of insurance or other evidence of such
insurance coverage.
Any obligation to Indemnify shall survive termination of this Agreement, if the alleged act
giving rise to liability occurred during the period during which this Agreement was in
effect.
17. Disputes. In the event of a dispute arising out of the performance of this Agreement
either Party shall, as soon as a conflict is identified, submit a written statement of the
conflict to the other Party. Within five working days of receipt of such a statement of
conflict, the second Party will respond and a meeting will be arranged not more than five
working days thereafter to arrive at a negotiated settlement or procedure for settlement. If,
within 20 working days from the initial filing of a statement of conflict a settlement cannot be
reached, the Parties agree to n1ediate any disagreements in good faith. Should either Party
determine the dispute cannot be resolved in mediation, the Parties agree to participate in non-
binding arbitration. Should these alternative dispute resolutions procedures fail to resolve a
dispute between the parties, it is agreed that the dispute may be resolved in a court of law
competent to hear this matter, consistent with the provisions of Paragraph 24. To the extent
legally enforceable, the Parties to this agreement Covenant not to Sue each other.
18. Attorney's Fees. In the event either Party to this Agreen1ent brings a judicial proceeding
to enforce or interpret any provision of this Agreen1ent the prevailing Party shall be entitled to
recover reasonable attorney's fees and related expenses and costs, including but not limited to
court costs, expert witness fees and expenses, and accountant fees and expenses. Recovery of
these fees and costs shall be as additional costs awarded to the prevailing Party, and shall not
require initiation of a separate legal proceeding. Any fees or costs awarded by this paragraph
shall be added to the cost estimate referenced in Paragraph 10, and shall not be subject to
limitation.
19. Entire Agreement. This docun1ent represents the entire Forn1ation Agreen1ent
between the Parties, and supersedes any prior written or oral negotiations and representations
between the Parties.
20. Severability. If any provision; or any portion thereof, contained in this Agreement is
FORMATION AGREEMENT BETWEEN THE CITY OF PACIFIC GROVE AND MOSS LANDING COMMERCIAL Pl\RK, LLC
PAGE 6 OF 9
Regular Agenda Item No. 14D
Attachment 1
held unconstitutional, invalid, unenforceable, or contrary to public policy, the remainder of this
Agreement, or portion thereof, shall be deemed severable, shall not be affected and shall remain
in full force and effect.
21. Mutuality. This Formation Agreetnent is the product of negotiation and preparation
by and among the Parties represented by counsel. All sides and their counsel have reviewed and
have had the opportunity to revise this Agreement. The Parties waive the provisions of Section
1654 of the Civil Code of California and any other rule of construction to the effect that
ambiguities are to be resolved against the drafting Party, and the Parties warrant and agree that
the language of this Agreement shall neither be construed against or in favor of any Party.
22. Waiver. A Party's failure to insist on the strict performance of any provision of this
Agreement or to exercise any right, power, or remedy upon a breach of this Agreement shall not
constitute a waiver of any provision of this Agreement. Neither shall such action or inaction limit
the Party's right to later enforce any provision or exercise any right to the fullest extent allowed
under this Agreement. A waiver of any covenant, term or condition contained in this Agreement
shall not be construed as a waiver of any subsequent breach of the same covenant, term or
condition. The consent, authorization or approval by a Party of any act shall not be deemed to
waive or render unnecessary the consent, authorization or approval of any subsequent similar act.
Any waiver of any terms or conditions must be in writing and signed by the Parties.
23. Amendment. This Agreement shall be mnended or modified only by an instrument in
writing duly approved and signed by each Party hereto.
24. Governing LawNenue. This Formation Agreement shall be governed by and
construed in accordance with the laws of the State of California. Venue for any disputes and/or
claims between the Parties under this Fonnation Agreement shall be Monterey County,
California.
25. Notices. All cominunications to either Party by the other shall be deemed given when
made in writing and delivered or 1nailed to such Party at its respective address, as follows:
City: City Hall
With a copy to:
MLCP:
3 00 Forest Avenue
Pacific Grove, CA 93950
City Attorney
606 Forest Avenue
Pacific Grove, CA 93950
449 Alvarado Street
Monterey, CA 93 940
26. Term and Termination. This Forn1ation Agreen1ent shall expire upon the earlier of
(1) full execution of the Desai Agreen1ent, or (2) upon mutual written agreement of the Parties to
terminate, or (3) upon 30 days advance written notice to the other Party of either Party's intent to
withdraw, based upon that Party's good faith detern1ination that further participation is not
feasible for any reason. Withdrawal from this agreement shall not effect obiigation
FORMATION AGREEMENT BETWEEN THE CITY OF PACIFIC GROVE AND MOSS LANDING COMMERCIAL PARK, LLC
PAGE 7 OF9
Regular Agenda Item No. 14D
Attachment 1
to pay for all costs actually incurred pursuant to Paragraph 8, 9, 10 or 16, above, prior to the
date of withdrawal Payment in full of such obligations shall be made within 24 hours of
the effective date of withdraw.
In the event of termination or withdrawal from this Agreement, MLCP shall be entitled to
full and exclusive use of any CEQA work or other work performed by either party during
the term of this Agreement.
27. Attachments. The following exhibits attached hereto and referred to in the preceding
paragraphs are, by reference, incorporated herein and made an integral part of this Formation
Agreement:
Attachment A. City Rate Schedule
In addition, a separate exhibit is attached hereto for the purpose of clarification. This exhibit
is not incorporated into this agreement, and shall not fonn a part of this contract. The sole
purpose for this exhibit is to better construe the scope of the referenced De sal America concept.
For reference, this exhibit is known as:
Attachment B. The People :S Moss Landing Water [)esal Project: A Green .Sustainable
Project, dated March 2012.
28. Date of Execution. The effective date of this instrument is upon this Agreement
being duly executed, dated, and signed by the Parties.
IN WITNESS WHEREOF, the parties hereto have entered into this Agreen1ent effective as of the
day and year written below.
Dated:
-------
Dated:
Dated:
Approved as to Form:
Thomas Frutchey,
P. a.c .ifi.Ic-:ove City Manager.. . / -
//
Nader Agha, Managing Member
Moss Landmg /
(__. ..
Nader Agha, an Individual
C. Laredo, City Attorney
City of Pacific Grove
FORMATION AGREEMENT BETWEEN THE CITY OF PACIFIC GROVE AND MOSS LANDING COMMERCIAL PARK, LLC
PAGE 8 OF 9
Regular Agenda Item No. 14D
Attachment 1
Attachment A
CITY RATE SCHEDULE
Expenses to be reimbursed by lvfL .. CP shall include, but shall not be li1nited to, City staff time and costs, City
Attorney time and costs, retained special counsel, costs of consultants and other experts retained by City,
\v'id1 10% City' O\ crhcad for co:JtJ it incun.
Rates, which are subject to modification from time to time, at the time of execution include:
Direct Overhead (1 0/o) Total
City Manager - $110.00 $11.00 $121.00
Environmental Programs Manager 65.00 6.50 71.50
Chief Financial 0 fficer 75.00 7.50 82.50
City Attorney 220.00 22.00 242.00
FORMATION AGREEMENT BETWEEN THE CiTY OF PACIFIC GROVE AND Moss LANDING COMMERCIAL PARK, LLC
PAGE 9 OF 9
Monterey County HeraldLetter to the EditorJune 12, 2012:
Agha opposes Narigi on panel

I am concerned that the Technical Advisory Committee of the mayors joint powers agency is too little
technical and too much political.

It is one thing to have George Riley on it, a student of water issues and stimulant for addressing
important policy questions. But it is quite another to have John Narigi on it, the political kingpin for the
hospitality industry. He is not a water expert. He has been making biased bureaucratic comments about
my Peoples desalination project and our list of questions that was answered with the help of the best
engineers and consultants.

The Peoples Project has received a great evaluation from the independent consultant with the ultimate
findings of no fatal flaws. Narigis history on water is essentially political and he has acknowledged his
preference for the Cal Am proposal in public. He is also known to be closely connected to the Deep
Water Desal. How do you expect an objective evaluation of the desal proposals with his inexperience
and inability to make an educated independent evaluation? His project preferences are widely known.

I am concerned that the Peoples Project will not get a fair hearing. I believe he should recuse himself
because in our opinion he does not stand for the best interest of the ratepayers. This is clear due to his
bias toward Cal Am, which made a deal to reduce his groups water rate and push the burden towards
ratepayers.

Nader Agha

Pacific Grove
Regular Agenda Item No. 14D
Attachment 2
City of Pacific Grove Prehearing Conference Statement
A.12-04-019


BEFORE THE PUBLIC UTILITIES COMMISSION
OF THE STATE OF CALIFORNIA


Application of California-American ) Application 12-04-019
Water Company (U210W) for Approval ) (Filed April 23, 2012)
of the Monterey Peninsula Water Supply )
Project and Authorization to Recover )
All Present and Future Costs in Rates )
____________________________________)



PREHEARING CONFERENCE STATEMENT
OF THE CITY OF PACIFIC GROVE














Thomas Frutchey
City Manager
City of Pacific Grove
300 Forest Avenue
Pacific Grove, CA 93950
Telephone: (831) 648-3181
Facsimile: (831) 657-9361
Email: tfrutchey@ci.pg.ca.us

CITY OF PACIFIC GROVE


June 4, 2012



Regular Agenda Item No. 14D
Attachment 3
City of Pacific Grove Prehearing Conference Statement
A.12-04-019


BEFORE THE PUBLIC UTILITIES COMMISSION
OF THE STATE OF CALIFORNIA


Application of California-American ) Application 12-04-019
Water Company (U210W) for Approval ) (Filed April 23, 2012)
of the Monterey Peninsula Water Supply )
Project and Authorization to Recover )
All Present and Future Costs in Rates )
____________________________________)



PREHEARING CONFERENCE STATEMENT
OF THE CITY OF PACIFIC GROVE

Introduction
The City of Pacific Grove (City) hereby submits its Prehearing Conference Statement for
the scheduled June 6, 2012 Prehearing Conference in accord with Administrative Law Judge
(ALJ) Weatherfords Ruling of May 11, 2012, and Rule 7.2 of the Rules of Practice and
Procedure (Rules) of the California Public Utilities Commission (Commission).

Issues to Define the Scope of the Hearing
The City believes there are a number of issues worthy of in-depth analysis. However,
rather than repeat issues already identified by other interveners, including the Monterey
Peninsula Regional Water Authority (MPRWA), of which the City is a member, the City
identifies here only the following additional issues it requests be addressed in the hearing:

Development of a desalination projectas one major component of the Projectappears
necessary. In order to best serve the ratepayers, and maximize the chances that the replacement
water is available on time, the City believes that the principal competitive project proposals must
Regular Agenda Item No. 14D
Attachment 3
Page 2
all be vetted using four main criteria: technical feasibility; on-time deliverability; cost to
ratepayers; and governance.

Given the likely costs of the water generated by one or more of the three major
components of the proposed project will represent a significant increase over current costs and
require a significant increase in rates, small projects that were previously rejected should be re-
examined, as they may now be cost-competitive. Examination of small projects should not
provide a basis to delay approval or delivery of the proposed project, but may offer opportunities
to reduce its scale or cost provided those alternates are achievable in a timely manner. The City
is prepared to discuss one or more small project opportunities that appear promising.

The lack of any role for representatives of local ratepayers in governance is still a matter
of concern. Such a role can be accomplished through either a public partner or through the
ongoing decision-making structure. A public partner may insulate the risk of operational
disruptions and public health impacts, may ensure the lowest cost financing and thereby
minimize rate impacts, and may best address concerns over growth inducement. Involving the
cities in ongoing Project decision-making ensures that the ratepayers interests are represented,
and such interests adequately balance the interests of investors. We believe that such public
involvement in governance must include binding application as to the projects design, financing,
construction, and operation.

The Project faces a number of actual and potential legal hurdles that create risk of
litigation and delay. The Commission is uniquely able to design a review and approval process
Regular Agenda Item No. 14D
Attachment 3
Page 3
that enables collaboration and compromise among the various parties to address outstanding
issues, develop mutually acceptable solutions, and minimize litigation risk.

Workshop
In view of the complexities of the issues and need for timely resolution, the City supports
holding a workshop, preferably in Monterey County, which will tend to increase participation of
local interested parties and their acceptance of developed solutions.

Settlement
The City is willing to participate in settlement discussions, with or without mediation,
and is committed to ensuring they are productive.

Schedule
The proposed schedule does not identify the timing of environmental review. A
completed environmental review, including public comments and responses, is critical to
formulation of mitigation and alternatives, which may constrain the selection and costs of the
options available for evaluation in the formal proceedings. In order to ensure that environmental
considerations are incorporated into the formal proceedings, a final environmental document
should be published before testimony and evidentiary hearings.

Conclusion
The City looks forward to working with all interested parties to achieve the best and most
timely solution for the Monterey Peninsula.
Regular Agenda Item No. 14D
Attachment 3
Page 4

Dated: June 4, 2012 Respectfully submitted,

/s/Thomas Frutchey
Thomas Frutchey
City Manager
City of Pacific Grove
300 Forest Avenue
Pacific Grove, CA 93950

Regular Agenda Item No. 14D
Attachment 3
Regular Agenda Item No. 14D
Attachment 4
A. 12-04-019
Schedule Proposed by ALJ in PHC on June 6, 2012
Prehearing Conference
17/f; k
Scoping Memo and Ruling
Opening Briefs on Selected Legal Issues
Reply Briefs (previously set for July 25)
Workshop
Comments on interim rate relief
and slant test well requests of Applicant
Last opportunity for Amended/Supplemented
Applicant Testimony, if any
Repy Comments on interim rate relief
and test well requests of Applicant
Rebuttal Testimony
June 6, 2012
._::rv,.., L>
June 27, 2012
July , 2012
uly 20, 2012
July 26-27, 20J 2
Augus 9, 2012
August 16,2012
August 21, 2012
September 18, 2012
Settlement (optional) September 24-0ctober 5, 2012
Proposed Interim Decision on inte1im rate relief,
slant test well and select legal issues
Public Participation Hearings
Evidentiary Hearings
Briefing
Proposed Decision
September 2012
September 2012
October 2012
November 2012
January 2013