MEMORANDUM

TO: FROM: DATE: SUBJECT: MPRWA Board of Directors Technical Advisory Committee November 14, 2012 SPI Draft Report Evaluation of Seawater Desalination Projects

Introduction The Authority received a draft report from Separation Processes Inc and Kris Helm Consulting on November 6, 2012. At its November 13th meeting the Authoritys Technical Advisory Committee discussed the report and held public comment, in order to identify key issues, variables, clarifications, and questions that might help the Authority board formulate a plan for completion of a final report and to identify next steps Recommendation The Authority Board should (A) Identify any significant issues or deal stoppers with respect to the draft report, that must be addressed; (B) Determine if there are a handful of key assumptions for which sensitivity scenarios should be analyzed. For example, for a given assumption, if that assumption does not hold true what is the effect on cost and timeline; (C) Suggest what the most useful improvements are that could be made to the report. For example, clarification of underlying assumptions. (D) Coordinate with SPI on what the process going forward should be in order to receive a final report. and (E) Raise any specific clarifications or questions an individual board member may wish to add to the detailed information which follows in the Background section of this memorandum, Background Below is a summary of specific issues/questions raised at the November 13, 2012 TAC meeting. DeepWater Desal On behalf of DWD, David Armanasco raised four areas of clarification and discussion with respect to the draft report: (i) Source Water Supply and Quality, (ii) O& M Cost, (iii) Schedule, and (iv) Project Risk. Please see the attached DeepWater memorandum.

Peoples Moss Landing Paul Hart, the PML attorney raised seven areas of inquiry: (i) would like to see the capital recovery for Cal-Am in Table 5-2 reflect a higher cost of capital, such as 11%; (ii) believes there are advantages to ownership in that future lease costs after the thirtieth year should be reflected in overall cost of projects which assume leases, in that ownership costs are fully amortized over thirty years; (iii) If Cal-Am needs to assert eminent domain to gain site control, what will be the impact on cost?; (iv) Did not feel DWD third part intake costs were adequately reflected (but was directed to re-read the paragraph following Table 5-6); (v) Wants to be sure the additional capital and operating costs related to extraction, treatment, and return of Salinas Valley groundwater are fully included in the costs of potable water delivered; (vi) Would like clearer explanation for the difference in timelines why is the PML schedule extended for a detailed project description, but not the other projects?; (vii) If DWD is a large regional project, with large upfront fixed costs, and the DWD analysis assigns only a percentage of those costs, who is paying for the rest and what are the risks that such costs are ultimately passed onto the Peninsula customers? Nader Agha expressed concern that SPI used data from PMLs July submittal, but should have used the updated October 2012 submittal. He also expressed disagreement with the reports schedule and believes the environmental document PML has produced, which he referred to as a focused EIR, would expedite the schedule. He disagreed with the cost numbers developed by SPI as inconsistent with the estimates PML has already made. Members of the TAC George Riley asked several questions: (i) Where is each project in terms of site control and does it introduce more variability than reflected in the report? (ii) Will an EIS (federal review) be required of Cal-Am and what effect would it have on the Cal-Am schedule? (iii) The proprietary intake is an unknown when will more information become available and what impact will it have on the analysis? (iv) Is the additional capital and operating costs related to extraction, treatment, and return of Salinas Valley groundwater are fully included in the costs of potable water delivered? (v) it appears there are several items in the Cal-Am schedule being performed simultaneously can more tasks be done in parallel to shorten the other projects schedules? (vi) Whether the periodic replacement of the slant wells was factored into the cost analysis for Cal-Am's proposed project? and (vii) What is the state of ownership at the end of the 30 year analysis period (terminal year) and can that be factored into the analysis? (since presumably all of the plants operate for longer than 30 years.)

John Narigi inquired about the following: (i) Slant wells appear to be a large cost component is it worth it relative to the use of Ranney wells? (ii) What would be the difference in cost? (iii) Where is each project in the schedule right now? (iv) Is the operating assumption of running the Cal-Am facility at 98% capacity realistic or sensible should capacity be larger? (v) What is the schedule for slant well testing and Coastal Commission approval, and does the Cal-Am schedule adequately reflect it? (vi) What impact will the groundwater replenishment CEQA delay have on the overall Cal-Am CPUC application and schedule? Mr. Narigi, in a follow-up email added the following (i) What would the two Moss Landing projects charge Cal-Am as the wholesale cost of water how is that to be determined? (ii) What are the cost and schedule issues, if PML infrastructure is determined to be in worse condition than described?

Rick Riedel made three observations: (i) the water quality of each proposed project appears to vary, as described in chapter 4 is there a common standard, and does the financial analysis bring them to the common standard? (ii) We should be reminded that the fatal flaw sections are technical in nature, not legal and/or political, which do pose significant risk; and (iii) Does the analysis adequately address whether sufficient dispersion of brine discharge can be achieved, and if not, what is the incremental cost to do so? Mayor Burnett asked DWD and PML appear to underproduce in the 5,500 AFY scenario as shown, for example, on page 4-5? Mayor Burnett has also suggested that it would useful to identify the key variables that affect cost and schedule and request SPI do a sensitivity analysis on those. For example, they already have done sensitivity analysis on the cost of electricity at least for Cal-Am's project. Another example might determine how sensitive the cost effectiveness of DWD is to the assumption that they will be able to build a 25,000 AFY plant. If that does not come to pass and the capital costs of pipes, etc will need to be spread across a smaller volume of water, how much more expensive is that water per acre foot? See page 5-7 and 5-8. What happens to PML and DWD if MLPP is shut down or once-through cooling ceases? For PML, how do costs change if existing intake system is unusable? Other questions raised by Mayor Burnett: How should we evaluate schedule risk versus cost of water? How much will it cost our communities to have a project delayed by 6 months? What can be learned about schedule risk (especially for open ocean intake) from the Poseidon experience? (via email) Keith Israel pointed out that the cost comparisons were -30% to +50% estimates, a range much wider than the differential in cost between the projects. Hence, costs are not absolutes but ranges, and all the projects are within a reasonable range of each other. Members of the Public Doug Wilhelm questioned the use of Surcharge 2 for funding a portion of the Cal-Am project, suggesting that it should be made available to the public projects or removed from the Cal-Am analysis especially since the CPUC may not allow it in whole or in part. Dale Hekhuis also questions the use of Surcharge 2. He inquired as to whether SPI has reviewed CalAms recent contingency filings to the CPUC and determined what the cost impacts of those would be. Mr. Hekhuis also submitted a single page letter (attached.) Sue McCloud submitted a series of twenty questions (attached.) Safwat Malek questioned why the capital costs for the Cal-Am project are so much lower than Cal-Ams published estimates in their application and presentations to the community. Ron Weitzman, via email, raised a series of questions (attached.)

Issues of SPI Draft Report:

1. Single pass RO system proposed by DWD and PMLwhile CalAm partial double or two pass systemwhat are advantages/disadvantages and what is cost factor for single vs double? 2. If PML cannot use all or part of intake infrastructurewhat is cost differential to upgrade (es-7)? 3. Does energy cost use MRWMD poweralso green aspect if this energy generated from landfill methane is used. 4. Implementation schedules (es-7). Pls expand for each of 7 points, where is each project now in the process and what steps are yet to be accomplished and in what time frame. 5. Saw no mention of legal action impact for any of the projects. 6. CalAm project do costs reflect 8 slant wells or 5 and shouldnt budgethave both costs? 7. Would be helpful to have a map with SVGB superimposed over the CalAm project. 8. DWD talks about Phases 1 and 2yet text seems to talk about infrastructure being done at the outsetif so, will the desal project be helping to pay for the larger(25,000 acre ft.) project which would accommodate North County and others? 9. Both DWD and PML use corrosion inhibitorsis this for intake and outflow pipes? As it does not appear in the CalAm costs. 10. Page 3-2 this a small matter but the 46 acre parcel is accessed by an easement from the Monterey Regional Waste Management District. 11. Fall back for CalAms slant wells would be the Ranney well but no indication of cost difference and any approvals necessary. 12. DWD intake pipe crossing Hiway 1what is involved in using existing tunnel and was this taken into time factor for necessary permissions 13. DWD refers to proprietary systems of MLPPhow will costs be obtained 14. Was lack of redundancy for product storage figured in for some suitable temporary storage?

15.3.2.5 When will additional analysis to assess the vertical mixing zone at the interface of the submarine canyon be completed 16.Cost of construction within the flood plain 17.Recommendation for partial second pass RO treatment systemcost? 18.3.3.4 several unknowns relative to the outfallcosts and time 19.What is process/cost of returning groundwater to the Salinas Basin? 20. Economicsevaluatedhow and by SPI? Page 5-6 top of page you independently adjust costs and developed your own estimateshope you share these systems/systems with someone. Sue McCloud 11/13/92 624-7310