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AARON P. JOHNSON PAUL W. MONCRIEF

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DENNIS J. LEWIS KOREN R MCWILLIAMS DANIEL E. GRIFFEE J. KENNETH GORMAN KARL! R JUNGWIRTH

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STATUS REPORT DATE: TO: FROM: June 20, 2012 Honorable Mayor and Members of the City Council Paul Hart, Esq., Counsel for Nader Agha and Moss Landing Commercial Park, LLC (MLCP)

MEETING DATE: June 20, 2012 RE: Formation Agreement Between City and MLCP

I.

Recommendation: A. Receive update on:

1.

2.

Finalized language of indemnification language of paragraph 15 of the agreement; Communications with other cities regarding joining Formation Agreement.

B.

Approve indemnification language of paragraph 15 and instruct City Manager to execute the Formation Agreement.

II.

Factual & Procedural Background:

A.

At the May 16, 2012, City Council Meeting, the Council:

1.

2.

Approved and accepted the Formation Agreement, with the exception of paragraph 15 (the "Indemnification Provision"). Directed City staff to negotiate and finalize the language of the Indenmification Provision.

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June 20,2012

3.

Directed staff to contact other cities to evaluate their interest in joining City in the formation agreement and report back to the Council.

B.

Indemnification Provision Language:

I.

Shortly after the May 16, 2012 hearing, MLCP and Mr. Agha agreed to accept the language of Paragraph 15 in exactly the form requested by the City. As such, final agreement was reached on MLCP and Mr. Agha executed the Formation the issue. Agreement and asked the City Manager to execute the agreement. The City Manager declined, citing a need for the City Council to approve the language of the Indemnification Provision.

C.

Communications with Other Cities regarding Formation Agreement:

I.

2.

3.

MLCP, The Mayor and Staff contacted other cities regarding their interest in pat1icipating in the Formation Agreement and the People's Desai Project. Numerous mayors and city representatives expressed interest in the project and cited an interest in potentially participating in the Formation Agreement and the People's Desai Project. However, the city representatives indicated that it was premature for them to join in the Formation Agreement today. Rather, they would prefer to have additional information regarding the project's viability before joining the project. Specifically, they would like to see the results of the JPA TAC report, the results of the JPA 3'd party economic report and get a better feeling for the CPUC's position on Cal Am's current proposal before making a final decision.

Ill.

Overview 1. The Council has already approved the Formation Agreement, except the language of the Indemnification Provision. Since the Council's approval of the agreement, MLCP and Mr. Agha have worked in good faith and have honored the Council's direction from the last meeting. MLCP and Agha accepted the City's proposed Indemnification Language, removing the only remaining issue of formal approval. Despite prior Council approval of the Formation Agreement, the City Manager's report advocates disapproval of the Formation Agreement on grounds that have been previously considered and rejected by the Council.

2.

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3.

Contrary to the assertions in the Agenda Report, the City is not exposed to risk as a result of entering the Formation Agreement. MLCP and Agha have committed to provide up to $600,000 to cover all associated costs. MLCP and Agha have agreed to indemnify the City. The City has the absolute right to withdraw from the Formation Agreement at any time. See paragraphs 10, 11, 13 and 26 ofthe Formation Agreement. MLCP and Aghahave agreed to consider providing additional funds to finance performance of the Formation Agreement, in their discretion, prior to exhaustion of the initial $600,000 commitment. The City has the absolute right to withdraw from the agreement if additional funds are not provided. Moreover, the City is under no obligation to enter the anticipated next agreement (the "Desai Agreement"), if for any reason, the City believes that entering the Desai Agreement is not in its best interest. Most importantly, the City has an obligation to its citizens to obtain the most reasonable cost of water. In significant pati, the City can advance this goal by entering the Formation Agreement. Merely entering the Agreement will insure that the CPUC, the Public, the JPA and the competing projects understand that MLCP has a viable project which must be considered. As a result, the regulatory and governmental agencies will have a wider array of options. Importantly, MLCP's competitors will also have to economically compete with the dramatically lower projected water costs of the MLCP project. The competition between the proposed water projects and the wider array of water supply options to the public will result in lower water costs and will provide a substantial benefit to the citizens of Pacific Grove. If the City refuses to enter the Formation Agreement, the CPUC and the other regulatory and public agencies will believe that Cal Am's currently proposed project is the only one to consider. They will not be forced to consider the MLCP project as a viable and less expensive alternative. As a result, the public will be deprived of options and Cal Am will have no incentive to reduce the price of its proposed project.

4.

5.

For each of these reasons, the City should approve and finalize the Formation Agreement. IV. Response to City Manager's Arguments Against Entering Formation Agreement: A. The City Manager's Agenda Report presents seven arguments against entering the Formation Agreement. Unfortunately, each of the arguments are flawed, for one or more of the following reasons: 1. The arguments are outside the proper scope of this meeting. The Council has already approved the agreement, subject only to the Indemnification Provision language of paragraph 15. 3

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2. 3. 4. 5. B.

The arguments attempt to re-hash arguments that have already been considered and rejected by The Council. The arguments are based upon inaccurate facts; The arguments are legally and procedurally inaccurate; The arguments improperly present "Opinions" as facts;

Approval by Regulatory Agencies

Here, the Agenda Rep01t espouses the opinion that the regulatory agencies are not likely to approve any of the three proposed projects, including MLCP's project, as they are currently configured. First, this is not a fact. It is not even an informed opinion. Second, this idea has already been considered by The Council. Everyone involved with the competing projects understands that each of the 3 proposals may (and probably will) be modified over time. For example, many citizens and government officials believe that it is important to include both Desalination and non-desalination components in crafting a global water solution. Currently, MLCP does not have a non-desalination component to its plan. The Council was well aware of these facts when it approved the Formation Agreement. Obviously, the fact that this component may ultimately be modified does not provide a reasonable basis for refusing to execute the Formation Agreement. Instead, MLCP and the Council understand that entering the Formation agreement will force regulatory agencies, the public and project competitors to evaluate whether MLCP's Desalinization component is the best situated, most environmentally conscious, most timely and most cost effective. option. As the Council previously determined, promoting this competitive process substantially serves the public interest. Viewed differently, if the City Manager's position is correct, then Deep Water and Cal Am, who also have projects with .flaws and which will be modified prior to any final approval should also abandon their proposed projects. Of course, they will not do so. The answer to the public water crisis is not to abandon a project because it has flaws. The answer is to present competing projects, force the competitors to correct the flaws to the best of their ability and ultimately let the public and their elected representatives to select the project which ends up with the best.6verall solution. The Council understands this and previously decided to enter the Formation Agreement so as to promote competition and to provide the public with the best array of options for solving the water crisis. The Council's prior decision was proper and was applauded by your constituency.
C.

CPUC Process

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Here, the Agenda Report asserts that the CPUC will not evaluate the People's Project as part of the current Cal Am application. Obviously, this is correct. But it is only a half truth. The CPUC 's job is to evaluate proposals and applications for approval that are submitted to the CPUC by entities governed by the CPUC, ie. Cal Am. Here, their only job is to evaluate the project application actually submitted by Cal Am. Since, at present, Cal Am's proposed project does not include a desalination plant in Moss Landing, the CPUC will not directly evaluate or approve building a desalinization plant in Moss Landing. However, if the City enters the Formation Agreement with MLCP, CPUC will need to perform a cost effectiveness examination of Cal Am's proposal. That examination will include a comparison of the project to other viable alternatives, including the proposal presented by MLCP. If CPUC concludes that MLCP's proposed desalinization plant would be substantially more cost effective, that would provide a basis for denying Cal Am's application, in part or in whole. If Cal Am's proposal is denied, in part or entirely, on the grounds that it does it is not sufficiently cost effective, then Cal Am will be forced to submit a new application which either agrees to accept the People's project as a provider of desalinated water or Cal Am would be forced to create an alternative desalinization plan which is as cost effective as the MLCP proposal. This is exactly the public benefit that is contemplated by the City's decision to execute the Formation Agreement. By contrast, if this Council refuses to enter the Formation Agreement, CPUC may well refuse to consider the cost effectiveness of the MLCP desal plant in evaluating the relative cost effectiveness of Cal Am's current proposal, claiming that it is not viable since it has no public partner. If there is no lower-cost alternative to Cal Am's proposal, CPUC may erroneously conclude that Cal Am's current proposal is sufficiently costeffective and approve the proposal despite its radically higher water costs. This will result in radically higher water costs to the citizens of Pacific Grove and its businesses. The City can combat these higher water costs, without spending any of its own money, by simply executing the Formation Agreement. D. Different Goals

The Agenda Report's contentions with regard to the goals of the parties to the Formation Agreement are simply false.

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First, Mr. Agha has never stated that his goals are to sell the Moss Landing land or to contract with the City to design-build the desal plant. Rather, Mr. Agha has offered to sell the land as part of the final desalinization project because he believed that financially this would be in the best interest of the City and the public. He presumed that the City and the public would rather own, than lease, the land upon which its water source rests. Frankly, this fact seems self-evident. Nonetheless, this is not a decision that need be made at this time. Moreover, purchase of the land in Moss Landing is not a requirement of this Formation Agreement. Nor will it be a mandatory condition of any final deal. Rather the proposal to sell the land to the public at an amount dramatically below replacement cost was intended to be a concession to the public, not a demand. Second, Mr. Agha has never conditioned any agreement with the City of Pacific Grove upon getting a contract to design-build the Desalinization Plant. Nor will he do so in the future. He has merely indicated that he is a shareholder in a company with substantial expertise in designing and building desalinization plants. He further indicated that this company would likely present a bid and proposal to build the facility in Moss Landing, if the City were to submit an RFP. As with the entire MLCP proposal, Mr. Agha is confident that Rodi's project proposal would win on its own merits. This does not create a conflict of interest and it is not an event that would arise unless and until the project was approved, accepted by regulatory agencies, obtained all necessary permits and was ready to be built. IfMLCP and the City of Pacific Grove get this far, the public will be well served and the Council will be celebrated for its exceptional performance on behalf of its constituency. E. Assertion that a Public Partner is Not Necessary

This contention in the Agenda Report is simply false. Monterey County law requires a public partner for all desalinization plants. Cal Am has challenged that law, asserting that entities which are subject to the CPUC are exempt from this Monterey County law. Ultimate determination as to the validity of Cal Am's contention is yet to be resolved by the courts. MLCP and many others, including Monterey County's government officials, asse1i that Cal Am's legal position is inaccurate. Any determination to the contrary by the CPUC is likely to be challenged in court. Moreover, even if Cal Am's position is ultimately found to be legally accurate, the exception to the Monterey County law would not apply to MLCP. Any exception to Monterey County law would only apply to entities that are regulated by CPUC. MLCP is 6

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not regulated by CPUC, as such MLCP must have a public partner in order to comply with applicable laws. The City Manager indicates that he has interviewed several attorneys with expertise in water law with regard to soliciting their participation in the process of performing the requirements of the Formation Agreement. MLCP would like to know which of these prospective attorneys who are expetis in water law indicated that MLCP would not need a public partner. MLCP strongly suspects that none of the prospective attorneys agreed with this assertion in the Agenda Report.

F.

This Project is beyond the City's Capabilities

This argument was repeatedly heard and rejected at the prior City Council meetings. The Council members discussed this at great length at the last meeting on May 16,2012. The Council determined that its duty to its citizens with regard to a sustained water source. The Council determined that the public interest was best served by entering the Formation Agreement and forcing the public and the regulatory agencies to evaluate MLCP as a viable competing project. The Council expressly concluded that these priorities justified dedicating staff resources to this project, particularly since MLCP and Mr. Agha are reimbursing the City for 110% of the cost of the staff time spent. Since the City is being repaid for all staff time spent on the project, the City could simply hire additional staff or outsource projects without any adverse impact to the City Budget. The use of staff time at no cost to the City simply does not over-ride the important public interest advanced by entering the Formation Agreement. Rightly, the Council previously reached this conclusion. G. Legal & Financial Risks

Again, this issue was thoroughly addressed at the prior meeting. The Council approved the formation agreement and asked staff to work out MLCP's objection to the language proposed by the City for Paragraph 15. In response, MLCP agreed to accept the language drafted by and required by the City. The City agrees that MLCP and Mr. Agha accepted the City's proposed language. This should end the inquiry.

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Surprisingly, the Agenda Report asserts that the promises not to sue in Paragraph 16, may prevent indemnification, and thereby leave the City financially exposed. MLCP and Mr. Agha agreed to that provision upon insistence of the City. MLCP does not believe that the language would, in any way, prevent enforcement of the indemnification provisions. Nonetheless, if the City wants to remove that language from Paragraph 16, MLCP will agree to its removal. Importantly, the PARSAC attorney consulted by the City could find no fault with the language of the indemnification provisions of the Formation Agreement. Rather, the only negative comment was simply that "even the most comprehensive" indemnity provision can not protect against any conceivable risk. I believe that I stated exactly the same sentiment to the Council at the last meeting. The Council understood this, yet approved the Formation Agreement. The possibility of some unknown claim or cause of action which exceeds the scope of the indemnification agreement and the absurd claim that MLCP and Mr. Agha could have insufficient funds to indemnify the City are not realistic. Nor do they present any viable basis for renouncing the City's prior acceptance of the Formation Agreement or for refusing to promote the significant public interest presented. To the extent legally and practicably possible, the current contract protects the City's from economic exposure. What more can be asked? H. Agha's Commitment of Funds

Again, the Agenda Report attempts to characterize a readily apparent fact as justifying denial of the Formation Agreement. Obviously, $600,000 is not enough to conduct a full EIR, to obtain full approvals and permits for a desalinization plant, to enter a formal Desalinization Agreement, to present opposition to the Cal Am proposal before CPUC and to obtain outside financing to build the desal plant. No one ever stated or assumed that $600,000 would be sufficient to accomplish all of these tasks. Rather, Mr. Agha has put forward $600,000 in conjunction with the "Formation Agreement", which is the precursor to project evaluation and later entering a formal desalinization agreement. Obviously, additional funds will be needed to finalize this project.

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The fact that additional funds will be needed to complete the project does not mean that the City should not approve the Formation Agreement. Nor does it mean that MLCP will need another partner. The Formation Agreement is meant to assess the viability of the project and to take preliminary steps toward entering a Desalinization Agreement. The Formation Agreement specifically contains provisions whereby the City can request additional funds fromMLCP. Moreover, the City has the absolute right to walk away from the project if additional funds are not provided before the existing funds are exhausted. This issue was thoroughly discussed and evaluated by the Council at the last hearing. The Counsel concluded that the contractual provisions regarding the amount of funds being initially advanced by MLCP and the provisions for MLCP providing additional funds in the future were all acceptable. As such, the Council approved those provisions of the Formation Agreement. The issue need not be revisited here.

V.

Conclusion

It is troublesome to MLCP that the Agenda Repmt appears to present opinions, facts (accurate and inaccurate) and legal conclusions (accurate and inaccurate) in a manner designed to encourage the City Council to overturn its prior approval of the Formation Agreement.
Also troubling is the assertion that the City Manager is better positioned than the City Council to promote the interests of the citizens of Pacific Grove. MLCP does not believe this to be true. Nor does MLCP believe that the Agenda Report gives proper consideration to the public benefit provided by viable competition to provide water to the citizens of Pacific Grove. Without viable competition, the water needs of the citizens of Pacific Grove will be left exclusively to a Private Company with an interest and a duty to maximize its profit. The public's interest in a constant and inexpensive water supply is simply too important to be left exclusively in the hands of a private company. Monterey County understood this and passed a law requiring that any desalination plant be publically owned. Cal Am is attempting to circumvent this requirement. The public needs to be provided with an alternative, whereby they can choose to have their water controlled by a public agency, not by a private company. For all the reasons cited previously by The Council, the pursuit of publically controlled water for the Citizens of Pacific Grove and avoiding the exorbitantly high cost of water

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from the Cal Am project is in the best interest of the City. Moreover, the City can take this next step without risk of any kind and without any out-of-pocket cost.

Ill

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