Allen Matkins Leek Gamble Mallory & Natsis LLP

Allen Matkins

Attorneys at Law Three Embarcadero Center, 12111 Floor 1San Francisco, CA 94111-4074 Telephone: 415.837.15151 Facsimile: 415.837.1516 www.allenmatkins.com
Robert R. Moore E-mail: rmoore@allenmatkins.com Direct Dial: 415.273.7465 File Number: 371546-00009/SD787767.01

Via Emaii/U.S. Mail

June 21, 2012

Mr. Charles J. McKee County Counsel County of Monterey 168 West Alisal Street, 3rd Floor Salinas, CA 93901-2439
Re: Monterey County Code Chapter 10.72 and Section 10.72.030B

Dear Mr. McKee: This firm represents California-American Water Company ("CAW"), an investor owned water utility regulated by the California Public Utilities Commission ("CPUC"). CAW is a "water corporation" as defined by California Public Utilities Code Section 241. CAW's Monterey County District system provides water for human consumption to over 40,000 customers and is a "public water system" as defined by California Health & Safety Code Section 116275 (h). As is well known in Monterey County, CAW must find a source of water supply to replace its current dependence on wells that pump from the underflow of the Carmel River. On April23, 2012, CAW applied to the CPUC for an order authorizing CAW to implement the Monterey Peninsula Water Supply Project. A key component of the Monterey Peninsula Water Supply Project is a desalination facility that will be located in Monterey County. The desalination facility will be an integral part of CAW's Monterey County District public water system. CAW asserts that Monterey County Code Chapter 10.72 and Section 10.72.030B are invalid as applied to CAW. CAW is a CPUC-regulated water utility and a public water system that is regulated by the California Department of Public Health. As such, Chapter 10.72 is not enforceable against CAW. Despite this legal defect, among others, the existence of Section 10.72.030B has been cited by several state and local agencies and entities as a reason why CAW should not be permitted to proceed with its Monterey Peninsula Water Supply Project.

Los Angeles I Orange County I San Diego I Century City I San Francisco I Walnut Creek

Allen Matkins Leek Gamble Mallory & Natsis LLP

Attorneys at Law

Mr. Charles J. McKee June 21, 2012 Page 2

Discussion

Because CAW is a privately owned public water system regulated by the CPUC, Chapter 10.72 is not enforceable with respect to CAW because it is expressly preempted by Article XII, Section 8 of the California Constitution. The State has fully occupied the field of regulation of privately owned water utilities. The California Constitution provides for the creation of the CPUC and confers jurisdiction over water corporations to the CPUC. CAW's proposed desalination facility and its appurtenances constitute a major water facility. CAW is subject to the jurisdiction of the CPUC and, pursuant to Public Utilities Code Section 1001, must obtain a certificate of public convenience and necessity before proceeding with construction of the desalination facility and its appurtenances. In pre-determining that CAW cannot own and operate a desalination facility, Chapter 10.72 improperly regulates matters over which the Legislature has granted regulatory power to the CPUC and improperly intrudes into a field fully occupied by the requirements of the Public Utilities Code and the decision making processes employed by the CPUC. Similarly, the California Department of Public Health is the agency designated to issue permits to operate large public water systems and to regulate the construction or additions to water supply for such public water systems. CAW's proposed desalination facility will be an integral part of CAW's water supply for its Monterey County District public water system. Monterey County therefore has no authority to prevent CAW from owning and operating a desalination facility in Monterey County. (See California Health & Safety Code Sections 116270(g), 116330(a) and 116550(a)). Monterey Code Chapter 10.72 also purports to impose various regulatory obligations on CAW that are duplicative of the California Safe Drinking Water Act, an area of regulation completely occupied by the State Department of Public Health because the Monterey Peninsula Water Supply Project will be an addition to and modification of CAW's public water system that will require approval by the California Department of Public Health. In other words, Chapter 10.72 far exceeds the boundaries of the County's authority ifthe County applies it to CAW.
California American Water Needs a Prompt Resolution

The requirements of Monterey County Code Section 10.72.030B that only a public entity can own and operate a desalination facility has and will continue to be a major obstacle to CAW's ability to move forward with its Monterey Peninsula Water Supply Project. Because CAW is not a "public entity," on its face the ordinance prohibits CAW from constructing, owning or operating a desalination facility. It would be futile for CAW to apply for a permit and go through the hearing CA Const. Art. XII, 1, 3-4; see Public Utilities Code 216(a); 240; 2701-2714, 2718-2720 and 2725-2726, all relating specifically to regulation of investor-owned water utilities.

Allen Matkins Leek Gamble Mallory & Natsis LLP

Attorneys at Law

Mr. Charles J. McKee June 21, 2012 Page 3

procedure outlined in Monterey Code Section 10.72.080 and the appeal process outlined in Monterey Code Section 10.04.120 under these circumstances. A prompt resolution is imperative to enable CAW to meet the mandate of the State Water Resources Control Board that CAW reduce its pumping from the Carmel River underflow by December 31, 2016. For the factual and legal reasons set forth above, CAW respectfully submits that Chapter 10.72 and Section 10.72.030B cannot lawfully be applied to or enforced against CAW, and therefore respectfully requests that the Board of Supervisors decide at its next meeting on June 26, 2012 that Chapter 10.72, including Section 10.72.030B, does not apply to and may not be enforced against the desalination facility proposed by CAW as part of its Monterey Peninsula Water Supply Project. If the Board of Supervisors decides that Chapter 10.72 and Section 10.72.030B do apply to CAW and its proposed Monterey Peninsula Water Supply Project or ifthe Board declines to make a decision that addresses the issue, CAW will file suit against the County to resolve this issue so that the Monterey Peninsula Water Supply Project can move forward to make certain that CAW's Monterey County District customers will have a safe, reliable water supply. Please let me know the Board's decision no later than June 27, 2012. Respectfully submitted,

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Robert R. Moore RRM:cjb cc: Anthony Cerasuolo (via email) Tony Lombardo (via email)

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