Draft CDO: City’s Claim of Serious Economic Impacts Unsupported by the Preponderance of Evidence & Invalid as Legal Argument

ABSTRACT: The State Water Board held hearings in the matter of the unauthorized diversion of water by California American Water (CAW) – Cease and Desist Order WR 2008-00XX-DWR – Carmel River in Monterey County. Phase 2 Hearing (July 24, 2008) Transcript of City Attorney Don Freeman and Mayor Sue McCloud and Closing Briefs Synopsis by the Attorneys for the Water Rights Prosecution Team and California American Water Company are presented. The totality of Mayor Sue McCloud’s testimony that the adoption of the Cease and Desist Order would have serious economic impacts was rebutted by the Attorneys for the Water Rights Prosecution Team, as follows: “The potential for harsh economic impact from the Draft CDO can be avoided by Cal-Am’s development of alternative water supplies and facility improvements that will reduce unaccounted for water loss…the reduction schedule in the Draft CDO could initially be met by a combination of alternative water sources and increases in Cal-Am system efficiency and some moderate amount of water conservation until water year 2014 when more substantial conservation measures would be necessary.” Furthermore, “the potential for harsh economic impacts as a result of adopting the Draft CDO is not legal grounds for finding the order improper. To the contrary, federal district courts have refused to balance economic and social utility concerns against the competing interests of protecting endangered species, because ‘Congress has decided that under the ESA, the balance of hardships always tips sharply in favor of the endangered or threatened species.’” A COMMENT is made regarding City Attorney Don Freeman’s line of questioning of Mayor Sue McCloud and his economic impact argument against the issuance of the CDO. A Decision by the State Water Resources Control Board is anticipated by the end of 2008.

In the matter of California American Water Company Cease and Desist Order Hearing:

• Attorneys for the Water Rights Prosecution Team
Closing Brief

SYNOPSIS OF ARGUMENTS:
THE PROSECUTION TEAM HAS PRESENTED SUFFICIENT EVIDENCE TO ESTABLISH THAT CAL-AM IS UNLAWFULLY DIVERTING WATER FROM THE CARMEL RIVER IN EXCESS OF ITS RECOGNIZED LEGAL RIGHT AND THAT THE REMEDY PROPOSED IN THE DRAFT CEASE AND DESIST ORDER (CDO) IS REASONABLE

CAL-AM’S DIVERSIONS FROM THE CARMEL RIVER IN EXCESS OF 3,376 AFA ARE UNLAWFUL AND CONSTITUTE A CONTINUING TRESPASS REQUIRING THE ISSUANCE OF THE DRAFT CDO

THE DRAFT CDO APPROPRIATELY ADDRESSES THE ADVERSE IMPACTS THAT CAL-AM’S DIVERSIONS HAVE CAUSED ON PUBLIC TRUST RESOURCES AND BENEFICIAL USES OF THE CARMEL RIVER

NEITHER CAL-AM NOR ANY DESIGNATED PARTY PROVIDED EVIDENCE THAT THE DRAFT CDO WOULD ADVERSELY IMPACT THE PUBLIC HEALTH AND SAFETY OF THOSE WITHIN THE CAL-AM SERVICE AREA

THE REDUCTION SCHEDULE PROPOSED IN THE DRAFT CDO IS REASONABLE AND SHOULD NOT BE MATERIALLY MODIFIED

ALLEGED ECONOMIC IMPACTS FROM THE DRAFT CDO ARE SPECULATIVE

The cities of Monterey, Seaside, and Carmel submitted testimony alleging that the Draft CDO would have serious economic impacts. The Cities’ conclusions concerning potential economic impacts are based on the general assumption that the Draft CDO will result in a moratorium on new connections and water rationing that would limit or prohibit the replacement or remodeling of existing homes or businesses, and new development for an extended period of time.

The City of Seaside is the only city that actually conducted an economic analysis in an attempt to determine the potential economic impacts of the Draft CDO. Seaside’s Economic Analysis, however, is an unrealistic worst case scenario.

Harsh economic impacts from draft CDO can be avoided.
The potential for harsh economic impact from the Draft CDO can be avoided by Cal-Am’s development of alternative water supplies and facility improvements that will reduce unaccounted for water loss…the reduction schedule in the Draft CDO could initially be met by a combination of alternative water sources and increases in Cal-Am system efficiency and some moderate amount of water conservation until water year 2014 when more substantial conservation measures would be necessary. Furthermore,..., the Deputy Director can modify the reduction schedule upon request from Cal-Am if the reductions cannot be met without endangering public health and safety.

The potential for harsh economic impacts does not make the draft CDO legally improper.
The potential for harsh economic impacts as a result of adopting the Draft CDO is not legal grounds for finding the order improper. To the contrary, federal district courts have refused to balance economic and social utility concerns against the competing interests of protecting endangered species, because “Congress has decided that under the ESA, the balance of hardships always tips sharply in favor of the endangered or threatened species.”

CAL-AM HAS THE ABILITY TO COMPEL EXISTING CUSTOMERS TO REDUCE WATER USE AND IMPOSE A CONNECTION BAN ON NEW USERS

ANY FUTURE ENFORCEMENT OF THE DRAFT CDO THROUGH THE ASSESSMENT OF LIABILITY SHOULD NOT RESULT IN THAT LIABILITY BEING PASSED ON TO THE RATE PAYERS

ALTERNATIVES TO THE DRAFT CDO SUGGESTED BY OTHER DESIGNATED PARTIES DO NOT PROVIDE CAL-AM WITH ANY INCENTIVE TO REDUCE ITS ILLEGAL DIVERSIONS FROM THE CARMEL RIVER BASIN

• Attorneys for California American Water Company
Closing Brief

SYSOPSIS OF ARGUMENTS:
Neither The Prosecution Team Nor Any Other Entity Participating In This Proceeding Presented Legal Argument Or Evidence To Support The Issuance Of A Cease And Desist Order

The Board Does Not Have An Adequate Basis To Adopt The Remedy Proposed By The prosecution Team; The Only Remedy Supported By The Law And The Record Is One That Allows CAW To Continue To Extract Up To 11, 285 Acre-Feet Of Carmel River Water Until Alternative Water Supplies Are Developed

Proceeding Violated CAW’s Due Process Rights

HEARING PHASE 2, VOLUME II
THURSDAY, JULY 24, 2008
APPEARANCES
CITY OF CARMEL-BY-THE-SEA, CITY OF SEASIDE, SEASIDE BASIN WATERMASTER:
Perry & Freeman
BY: Mr. Donald G. Freeman
San Carlos at 8th Avenue
P.O. BOX 805
Carmel-by-the-Sea, CA 93921

MR. FREEMAN: Good morning. My name is Don Freeman speaking on behalf of the City of Carmel as well as other panel members up here again today.

Just to follow on what you've heard so far, I think it is important in terms of the balance, but I think what we heard in all the testimony so far to this point in time, which you're going to hear again this afternoon and this morning, deals with the frustration, the frustration of the order which says we'd like you to get out of the river, the frustration with Cal Am saying we'd like to get out of the river, but what is the project people would like to have us do in order to replace the water from the river?

The reality of it is the frustration stands with the public process. That's our process. It's a long process. It's not where it's a business decision. We have a lot of interests out there we have to relate to, all of the jurisdictions, all the different agencies that are involved, also all of the residents that are involved.

So when you look at each of the people that are about to testify from each of the cities this morning, don't look at them as just individuals or just the mayor or just a councilmember from a jurisdiction.

Look at the entire population of the city itself or the jurisdiction itself. Because any decision this Board makes is going to affect the daily lives of each and every person that lives on the Monterey Peninsula or visits the Monterey Peninsula.

You heard testimony yesterday in terms of the water that Cal Am is taking out of the river and the diversions, and you heard round numbers. You heard 300 acre feet for Sand City. You heard a number that, in terms of an ASR project, 920 feet, but that that was constant throughout this process when in fact it does fluctuate.

The really of it is, when you hear the testimony today, you're going to hear Seaside say it's not just 56 feet, acre feet of water, that we have. It's 56.4. We're getting down to decimal points.

Next you're going to hear from Carmel. Carmel is going to tell you they have water left: 3.151. That's how we're measuring water on the Monterey Peninsula.

One of the cities not present here today is Del Rey Oaks. Del Rey Oaks has no water left to it at this point in time. They didn't have the resources to send someone up here and participate in this hearing today.

The economic -- if that water is, by the effect of your decision -- and I feel certain you're not going to have a moratorium placed on the District, but the -- or the Peninsula -- but the reality of it is it's a de facto moratorium. We already have that in place now. So all you would be doing is compounding something we already have in place.

Once the water issues for each of those jurisdictions, there is no more water available until a new water source comes online.

There is a total for all of the jurisdictions14 of 119 acre feet of water still remaining unused in the Cal Am service area on the Monterey Peninsula. That water was allocated by the Monterey Peninsula Water Management District prior to 95-10. Once that water is gone, it's gone forever.

If a moratorium or the effect of any decision you have places a moratorium or forces the Monterey Peninsula Water Management District to place a moratorium on the Cal Am service area and water rationing, that's going to affect the economic viability of each one of the jurisdictions. You'll hear testimony about that today.

The net effect of that is, if it affects their economic viability, then who is left to pay for any of the projects in order to solve the long-term water supply problem on the Monterey Peninsula, including the Carmel River problems?

You're going to hear later today -- not from this panel but from other people that will be testifying -- as to what potential solutions you may wish to consider, setting aside the draft cease and desist order, because there are a number of other options that wouldn't be as draconian in effect yet would have the ability of getting people together and keeping us focused on the main mission.

That main mission is to certainly get out of the river but at the same time provide for a reliable water supply source for the Monterey Peninsula in order to protect its economic viability as well as its health and safety needs.

So I think that it's very important when you're looking at the people and you hear them today, it's not just these individuals here, but they represent a tremendous number of individuals. And the effect on their quality of life is going to be devastating unless you do that balancing act which was talked about earlier today.

Thank you.

DIRECT EXAMINATION BY MR. FREEMAN
MR. FREEMAN: Mayor McCloud, would you state your name and spell it for the record please.

MS. McCLOUD: My name is Sue McCloud, M-c-C-l-o-u-d.

MR. FREEMAN: Excuse me. Do you have in front of you a declaration of Sue McCloud in support of proposed modifications to the draft cease and disorder, which is Carmel Exhibit 1?

MS. McCLOUD: Yes, I do.

MR. FREEMAN: And have you read and approved that declaration?

MS. McCLOUD: Yes, I have.

MR. FREEMAN: And in fact, did you assist in preparation with staff in preparing this declaration?

MS. McCLOUD: Yes, I did.

MR. FREEMAN: And is this a true and correct copy of the testimony that you provided to this Board?

MS. McCLOUD: Yes, it is.

MR. FREEMAN: Would you please take a moment and sort of describe what your role is for the City and how long you've been in this position?

MS. McCLOUD: Yes. I have -- this is my fifth term as mayor of Carmel-by-the-Sea. I grew up in Carmel. My family was in business there for some 30 years. My parents lived in Carmel. They're both gone now. My sister is there. I went to school---obviously, since I grew up there, I went to school there. And I have -- prior to being elected mayor, I was elected to the city council, and prior to that I was on the planning commission.

MR. FREEMAN: So are you intimately familiar with the workings of the city and especially in regard to the matter before this Board today in terms of water?

MS. McCLOUD: I believe so.

MR. FREEMAN: Can you describe briefly the demographics of the city of Carmel?

MS. McCLOUD: We're one of the smaller cities on the Peninsula. We have a population according to the 2000 census of 4,081 residents. We're 1.1 mile square.

Obviously, we're bordered by Carmel Bay on one side and greenbelt all around the other three sides. We have about 2800 homes. We have very few undeveloped lots. The development that's taking place in town is primarily upgrading, and that includes conservation measures.

But trying to get a second bathroom for people who are now aging, because one of the key points about our population, the median age is 55. So you can imagine that there are needs that they have if there's only a tub in the house in the bathroom that to convert it to a shower or put a shower someplace else, if water's not available, we've had people very adversely affected.

So we -- again, we think we have about the same amount of visitors in our town as Chuck Della Sala mentioned for Monterey, around two million. Those are figures from Monterey County Convention and Visitors Bureau.

But we have to provide for them as well, not only our infrastructure but the services they expect, whether it's restrooms on our one-mile-long beach --just the other day, June 21st to be exact, we counted 2500 people on the beach. And we essentially have one permanent restroom on the beach. So that you can compute the problems right there.

MR. FREEMAN: Are you familiar with the amount of water Carmel has unallocated –

MS. McCLOUD: Yes.

MR. FREEMAN: -- at this point in time?

MS. McCLOUD: At the present time, our 3.1519 is all we're faced with. And of that amount, we have pledged 1.9 for new affordable housing, about 14 units, which would increase our affordable housing by 10 percent in the city. That's due to go to construction in -- well, this fall.

So the trickle-down effect, if you'll pardon the pun, of not having water pervades the hotels and visitors, certainly business, and those who could count on jobs to -- you know, for their livelihood.

So if you're looking at the fact that if there were some sort of moratorium or rationing we had to close off hotel rooms -- we have a cap on our hotel rooms of just under a thousand -- you can imagine that would also, as I said, trickle down to those who are employed at those establishments or if we -- we have small, many restaurants -- I don't know if you'd call it many, but we have a number of restaurants, but they're all rather small. We don't have any large restaurants that you find in other places just because of the size of our properties.

MR. FREEMAN: If you had -- if there was a moratorium and/or water rationing, would it have an impact on the economic viability of Carmel and the services provided to the residents as well as the visitors?

MS. McCLOUD: It would have a huge impact. Our three biggest -- as you heard from the mayor of Monterey, our three biggest revenue sources are the TOT or the bed tax, as he called it, the sales taxes and property taxes. And that accounts for about 63 percent of our revenues coming into the city. So a loss of that would obviously scale back everything else.

We've scaled back -- and in the headlines in the Sacramento Bee this morning, we've already scaled back our staff as much as we can and tightened our belts over the years.

So we're -- we have done all we think we can to conserve. But as visitors continue to come, and unmandated -- unfunded mandates that come to us cause us to have to dip further and further into, you know, our imagination for how to solve some of these problems for visitors and for our residents.

MR. FREEMAN: I notice in your declaration on page 4 you mentioned the fact that if there were a moratorium it may have some detrimental effect to visitors actually coming to the Carmel area as opposed to going to other destinations. Is that –

MS. McCLOUD: That's an interesting point. Because you have to discuss this in the context of what our competition is. Our competition is obviously San Francisco, Napa, Sonoma, who do not have these constraints on their water supply; and therefore, we obviously would not be able to compete with them.

And we have also, in order to become more green, we have been converting -- some of our hotels were built a hundred years ago, and we're trying to upgrade them and make them more sustainable. And that -- if we are not able to do that, obviously our rooms and the expense of the rooms is not going to compete favorably with those who have done that type of upgrading in some of the other areas that compete directly with us.

One thing I would like to stress, going back to the water supply if I may, is the fact that the recent memories of the fires that we've just sustained on our south and east borders, our boundaries of Carmel in particular, is that 250,000 acres that were burned, and it is still not fully contained and may not be till the end of next week. Tens of millions of dollars were spent, and it came very close. And I looked out the window of my home and could see the fires, and I'm on the south end of the city.

So if people are going to use water – you know, if you live near a forest -- we have 40,000 trees in our one-mile-square city of Carmel, and people are very concerned about their safety and health.

MR. FREEMAN: Would a moratorium have any effect on the number of fire hydrants that may not be working in the city of Carmel? I know some work was done on those recently. Can you elaborate on that?

MS. McCLOUD: Yes. We discovered that we had a number, like about 30 almost, fire hydrants that were nonfunctioning. I must thank Cal Am for working very diligently with our police chief and public safety director to upgrade those.

But then putting new mains in, and we still have -- I'm not sure of the exact number at this moment, but I think it's nine have not been upgraded. They made other arrangements providing more than adequate fire prevention, but we still need to bring those back into service and replace the mains, get --the pipes are a hundred years old and have disintegrated, so that is in process as we speak. So we would not want to see that impeded, obviously.

MR. FREEMAN: Thank you.

MS. McCLOUD: Thank you.

MR. FREEMAN: That concludes the City of Carmel-by-the-Sea.

COMMENT:
• While as a matter of law, the Prosecution Team has the burden of proof of establishing that Cal-Am is unlawfully diverting water from the Carmel River and the Draft CDO is a reasonable remedy, similarly the City of Carmel-by-the-Sea has the burden of showing by a preponderance of the evidence that their claims are validly supported by the requisite evidence. Accordingly, from a review of the evidence, it appears City Attorney Don Freeman failed to support the City’s claim of serious economic impacts by a preponderance of the evidence. Moreover, City Attorney Don Freeman’s assumption, based on his leading questions to Mayor Sue McCloud, that the issuance of a CDO is synonymous with a moratorium and/or water rationing, was invalid and Freeman’s argument that the issuance of the CDO would result in serious economic impacts, when economic impacts are not a valid legal justification for not issuing a CDO, was also invalid. To wit, “the potential for harsh economic impacts as a result of adopting the Draft CDO is not legal grounds for finding the order improper,” according to the Prosecution Team.