Water Warrior, Part II
Full Transcript of Steve Leonard Interview
Thursday, September 14, 2006
WEEKLY: Put us in your shoes. You’ve got the federal and state government breathing down your neck to solve a 20-year-old water supply problem that you did not create. The water district hasn’t been able to fix it. Voters don’t want a dam. A desalination project keeps getting stalled. What do you do?
Leonard: I think it’s important for your readers to understand in blunt terms. It’s a relatively small water district: 40,000 customers, 110,000 people. Some of the things that have happened to this district are completely unrelated to who owns it: the water rights issue [on the Carmel River] is something that obviously nobody thought about until the ‘90s. It’s an unusual occurrence for an operating water utility to lose 70 percent of its water rights. That doesn’t happen to big utilities and to have it happen to this utility make us special, in that special sort of way.
And then, to add to that, you have the silting of the dam, the seismic stability issues with the dam. To have both of those things occur to one utility in a 10 year period is stunning.
To add to that, this is an old system. It’s a system that, for the most part, Cal Am didn’t build. Without the water rights problem, without the dam problem, this would be a difficult water system because of its own infrastructure issues.
So those three things together make this an expensive system to operate, a delicate system to operate, and expensive for the customers So all these things conspire, and again, it’s not because we’re a private utility that these things happened. It’s the fact of the matter. These things occurred.
Utility infrastructure all across the America is in deep, deep trouble.
We happen to have two projects in front of us that run at least a quarter of a billion dollars—the dam and the water supply project—those two issues alone represent a quarter of a billion dollars, $250 million of extra capital that needs to be done here. And we have 40,000 customers to pay for that. It is a stunningly difficult equation, and much of what happens here stems from that.
The people of the Peninsula feel very special about their water supply, and passionate about it. They’re frustrated because we could spend a quarter of a billion dollars and produce no new water. Our proposal for the coastal water project is to replace the [overdraft] of the Carmel River, and a little of the Seaside basin. Replace. Not produce more. And fixing the dam, strengthening it or removing it, doesn’t produce any new water. So two major, major projects that at the end of the day produce zero water, no new water. And, that’s the fact of the matter.
I understand why people scratch their heads and go, “My God.” That’s the situation we’re facing no matter who sits in my chair. That’s the situation we face every day.
WEEKLY: And on the how-do-you-pay-for-that issue: why should ratepayers start paying now, when the project has not even been approved?
Leonard: Well, I think there’s certainly precedent at the PUC for paying for projects while they are in construction. One of the things we’ve made clear from the get-go is that we’re open to essentially any solution that presents itself. We’re open to doing it ourselves, because—keep in mind the orders are against Cal Am, they’re not against any other entity. We have orders from the state board and from some of the fish and frog folks that we need to solve.
So we’re the ones on the hook to solve this. We have, since 2004, tried to partner with the County. As early as March 2004, we had a letter of intent signed by the Board of Supervisors to work with us towards a regional solution. Well, the Board of Supervisors backed away from that.
We’ve had the promise of another utility [Pajaro Sunny Mesa Community Service District] building a desal plant in Moss Landing. They’ve never come to us with a proposal. I’ve asked them twice to their face: Bring us a proposal; we could buy the water from you wholesale.
My direction is to find a water supply, and the traditional way to do that is to build it yourself. We’ve proceeding along that line but we have worked with, we continue to work with, every entity that is willing to work with us. Absent a viable County answer, a viable answer from another utility, we’re still on the hook and we’re moving forward.
Now, as we move forward, you get to the tactic of well, how do you pay for this? If we’re going to do it, and that’s an ‘if’—we continue to look for partners. One of the things we want to do is save ratepayers’ money. Well, if we collect money early for this project, first of all it avoids rate shock—rate shock being rapid increases in rates. To be fair, some people will find any increase in rates to be rate shock.
So, here’s a philosophical point: Is it early, or should we have been doing something 10 years ago? This is the ghost of 95-10 [the state order to reduce pumping on the Carmel River]. This is the bill for 95-10, which, for 10 years, really hasn’t been in play in a practical way.
The typical way we would do this as a company is to build the asset and then charge people on the backside. This, I think, by anybody’s definition, is an extraordinary project. It’s not like refurbishing a pump station, or building a new pipeline. This is building a new water supply and that’s a very different kind of thing.
By asking for the money upfront, it will lower the cost of the project to the customer in the long term. What it does for us, first of all, it allows the rates to ramp up as opposed to go up in a cliff-like fashion. It also, because we don’t have to borrow the money, that actually saves money because we’re not paying a debt service on loans we might take out to cover the construction.
WEEKLY: Okay, so let’s say we as a community need to pay for this project. Why not just start once it’s approved? Not even at the back end, once it’s built and finished, but why not just wait until it’s been approved?
Leonard: It’s an unusual project. We have significant investment in it now. The sooner people start to pay for it, ultimately the cheaper it will be.
There is current thinking in the PUC to have things paid for early, to save costs, to encourage projects to go forward. Keep in mind, this is our proposal to the PUC, the PUC ultimately has the final say. But as you can tell, most of this [motioning to a very thick three-ring binder with the legal briefings addressed to the PUC] is opposition to what we’ve proposed and maybe there’s just a philosophical difference here.
WEEKLY: And how many millions of dollars are we talking about when we talk about “all present and future costs” connected to the Coastal Water Project?
Leonard: One of the real serious issues we’re looking into now is the cost of construction is going up much faster than inflation. So there’s a serious concern out there about how much is it going to cost to build when you get there? Right now it’s about $200 million. And that’s reflecting delays. We’re at the point now where every month delays runs about $800,000. You take $200 million and you start adding an inflation factor to it. $200 million at 5 percent is $10 million a year. And that’s on the low side.
So one of the reasons why, when people say, “What about these other options with the county?” Well, the county’s not having much luck moving forward. How long do we wait for them? Sitting and waiting is not an option. It’s a very expensive wait.
Just one example: Our permit for the pilot plant was hung up in planning in Monterey County for most of a year. For issues that, I won’t argue if they were right or wrong, but it was there for most of a year. Our EIR that worked with the PUC has been at the PUC for close to a year before it really got rolling there. Those things, although they paralleled each other, are not inexpensive detours. In fact, when a county official called me and said, “We’ve got a very full agenda on Aug. 31” or whenever it was, “can we push it back a couple of weeks?” I said, “Hey, at $800,000 a month that’s going to your constituents, I can’t agree to that.” So they moved it up.
There are two things people need to keep in mind. Number one: The solution is not getting cheaper. Any solution is not getting cheaper. We have the one out there that is most advanced and obviously getting the most attention.
And secondly, there’s the issue of this is the wettest 10 years in the last 100. When does that next blip in the climactic cycle go on where this will become a devastating problem in Monterey? I’m not a big gloom and doom kind of guy, but at the end of the day, we are beginning to flirt with 1977 and 1992—something that brings us up very short, very quickly. I know projects take a long time. We’re moving forward as fast as we can. But it isn’t just about money. It’s also about, is there going to be water for this community? We’re starting to see in some of the folks who have opposed water projects are starting to say, “We’re not sure we like all of these projects but something needs to happen.” And we’re the folks who are obligated to do it, and we’re the folks who are saying okay, we’re doing it. I’ll make the point one more time: If there’s somebody out there who can do it faster, cheaper, smarter than we can, please, go interview them. Find out how they are going to do it. That’s the part to me that is so ironic. We’re taking the flack because we are out there doing it. The people who aren’t out there doing it ought to be taking the flack as well, if not more flack.
WEEKLY: Ratepayers will cover these costs by paying two surcharges, correct? The first will pay for preconstruction costs, and the second surcharge will fund actual building costs?
Leonard: [The second surcharge] is really creating a capital fund for water supply projects, the Coastal Water Supply project being the current best candidate. It isn’t specifically required for that. The first surcharge is to pay for the current work done on the Coastal Water Project and that is the planning, the environmental permitting stuff, and the public outreach, which seems to be the most controversial piece of that. Being the guy who put together much of the public outreach and did 50, 56 public meetings in a year to get the word out on this, it’s one of those damned if you do, damned if you don’t. The PUC, in their order to us when we submitted the application was to work on regional issues, or certainly be open to that possibility, and to do extensive public outreach. We’re being criticized for the public outreach we did. We did what I believe is the only way to do it. We went out there and told people all we knew at the time. We asked for questions. We didn’t go out there behind a shield of something. We weren’t being mysterious about it. We laid this stuff out. That’s my style anyway. Sometimes we had four people at the meetings; sometimes we had 100. I guess it’s easy to criticize that attempt. It wasn’t cheap, but I’ve been here four years. That was a year and a half ago. People saying to me, “How do you get this message out to people?” The only way I know to get the message out to people is to go out and see them. Go out and visit with them. We did some advertising, we did some mailers. How much of it was effective? It’s hard to gage, but it’s easy to criticize and say, “Oh, you did too much.” If we didn’t do enough, then you’re not transparent enough. This has been as transparent of a process as you can have, certainly for a privately owned company. It’s completely transparent. It will be harder for you to get information about other utilities than it is about us; it’s been a very public process. It’s been litigated. It’s in the public eyes. So we went out there and we used public meetings. We used public relations firms. Even people who criticized us, even editors of newspapers around who asked us the same question and criticized us, at the end of the day, when the interview was over, said, “I would have used Armanasco as well.” Because they were the ones who knew how to get out in the community. Now we’ve got our own person here. The costs will go down. But we thought it was important. If we did too much, that’s probably a better criticism than not doing enough.
WEEKLY: A legal brief by the PUC’s Division of Ratepayer Advocates really comes down hard on Cal Am for these public outreach costs: $1.2 million in public outreach and administrative costs—which equals $35 per customer on the Monterey Peninsula. The DRA compares this amount to other water agencies and it’s nearly 10 times more than any other water agency has charged.
LEONARD: What other water agencies?
WEEKLY: San Diego County Water Agency spent $435,855, or $0.44 per customer. Marin Municipal Water District spent $200,000, or $3.35 per customer. Orange County Water District spent $3 million, or $3.91 per customer. Why did Cal Am spend so much more?
LEONARD: I think it was the level of effort. We went out and did a lot of public meetings. The reason why I asked you about the other agencies…I’ve been in this business for 35 years and there is no place in California or this country where people know more about what water than in Monterey. There’s no place where they are more passionate about it; there’s no place where it’s more polarized than in Monterey. So, coming from my experience in a company that said, “We do not want to be in a situation where people say we did not do adequate public outreach or we did not make this project as transparent as possible, if I erred, I erred on the side of being sure that the criticism wasn’t you didn’t tell us. I haven’t heard that criticism. Although there is a great deal of oh my God, what are they up to? And I can tell you what we’re up to is what you see in public. Everything that we’ve said we’re going to do, we’ve done. Everything we’ve promised people we have delivered on and, at the end of the day, that’s all we can do. We said we were going to have a massive public outreach—we did. There’s criticism about that. That’s the nature of this business. It’s a business where people like to sit and complain about things that we do. I don’t want to play victim in this thing. Apparently, from what we can find out, the community has been at odds with their privately held water company for 100 years. We’re the latest, and longest running one. I guess my hope is that people will take a step back. At some point cost becomes irrelevant if you don’t have water. Let me switch you to the last scene in the Treasure of the Sierra Madre, all this gold and no water. Water is not an insignificant fact in the community. The value of water—people knew how valuable water was in 1977 when there wasn’t much of it. Right now, there’s an adequate supply. We’re making do. We are two or three dry months away from a serious problem. The Seaside Basin is overdrafted. That happened because of a bunch of local politics. We do not have a full canteen here and if we go into a dry spell, trust me, there are going to be people who come back to us and say, “You didn’t move fast enough, Cal Am.”
So I start out every day, at 6am, I get in the shower and say, “My shower works, did everybody’s else’s work?” And if everybody else’s worked, that’s another day. That’s our primary mission. To get you water, make sure it works, that’s the primary mission. The secondary mission is: Can I do it 24, 7, 365 onto infinity? Can I sustain this? Right now, we look year to year, based on the water supply. Can I do this decade to decade? If you ask me today, I don’t think we can.
So, we can debate about how to finance this stuff. We’re not debating, interestingly, whether we should have a water supply fund, it’s when do you start collecting it? The answer is: Should we have started in ‘95?
This is our proposal, and the people at the PUC, the policy makers will make the decision. We’ve got briefs and counter briefs about why this should happen. I think our motivation is, certainly, the step two is we proposed it because we think it’s prudent to have a water supply plan in, money ready to take care of that so you don’t have rate shock in the future. The question that I think is stimulating a lot more debate is: when do you start paying for a project?
Plan B was produced by the Public Utilities Commission. The PUC delivered that to us and said, “We think this is an alternative to the dam.” So, being relatively conservative and relatively prudent, we looked at this and said, “Maybe the PUC will support this since it is their study.” We went to them, they said, “Take a look at the regional issues, make sure there is public awareness, and move in this way.”
We’ve taken their project and reduced the size and cost of it because of engineering things. There’s a good faith effort on our part to do what a publicly constituted body and a two or three year’s study that rejected 55 other ways of doing business. We followed that. I listen to this long enough and I get the feeling that people think Leonard showed up and he said, “Let’s go do something crazy. Let’s build a desal plant at Moss Landing.” This is the most conservative track we could take. This is what our primary regulator suggested we do. So, is it unreasonable that we come back and say, “Look, we’re moving along that line?” It is expensive. There are 45 permits we have to get from 215 agencies. It’s stunning what we have to do to make this thing happen. Is it unreasonable that we should begin to collect money early in that process?
If we were just building a plant, that’s a certain kind of construction project. We’re building a water supply, which has social-political implications. Building a plant, there are some environmental issues. People might not like it but it’s a relatively straightforward deal. We’re talking about building a water supply. We’re talking about tapping into an inexhaustible supply of water—the Pacific Ocean. We’ve got surface water—70 percent of the rights we don’t have to it, that’s what we’re replacing. We’ve got ground water. Recycled water—there’s no place on earth that recycles water better than Monterey. We’ve got the best conservation of any place. That’s our base today. Well, our surface water base is very fragile and we don’t have rights to that. If we had storage, and we could store the winter flows of the Carmel River, I think we might be able to do it. That’s a dam, or an off-stream dam. Either one of those seems to be not what people want. So where do you go for storage? What the Monterey Peninsula needs is storage. No body wants to put storage up in the Carmel Valley. No body wants to put storage over at Armstrong Ranch. No body wants to put in storage, which is really what we need. The Carmel River really has plenty of water, in most years but it flows out to the ocean before you can catch it. So where do we go for storage? Well, the desal project is really a storage project because the Pacific Ocean is the ultimate storage basin. It is the biggest body of water on earth. Whether global warming is going to raise it an inch or lower it an inch is sort of immaterial to us in this decade. It becomes our storage. So what happens is we use all the other things we have—we use conservation, we use recycled water—but the Pacific Ocean becomes the storage. But that’s just not a facility project. That is fundamentally changing the water equation on the Monterey Peninsula. Would we do this public outreach for a pump station? We’d have a couple public meetings about a pump station and people would complain about noise and this and that and we’d mitigate that and we’d do it. This is a water supply. This is not about the facility. If God were to give us a cistern and fill it up every day, by immaculate generation of water, can you imaging what the EIR on that would look like? It would be stunning because it would change the equation of water on the Peninsula. We’re not proposing to change the equation of water; we’re proposing to change the storage.
WEEKLY: But it has the capacity to change the equation.
LEONARD: And the capacity issue will be debated in the environmental impact study.
WEEKLY: Do you think that is what it’s really about, not the monetary cost but the social and political implications? Here’s a project that could allow for more growth.
LEONARD: Not the way we propose it.
WEEKLY: Right, but in the future.
LEONARD: Our project won’t. But it does change the equation. It does allow other entities, and by the way, the PUC is currently working right now, the PUC staff on our environmental document is actually talking to all the cities and all the water agencies around here about how big this project should be. And we’ve said our obligation is to replace the water in the river and we’ve proposed that. In our proposal, we proposed the just-right-sized project, which is 11,000 acre-feet of water to solve the current shortages. We did the environmental analysis that we did for a 20,000 acre-feet, a whole regional project just to show what the environmental impacts of that are. And then we proposed a third option, which is to put in a small plant and a big pipe. The big pipe then says, “If you want to expand this plan, the plant is easy to expand.” It’s modular and you stick tubes in it. We said, look, this is what we’re proposing, but in the greater wisdom of the PUC or other folks, it if makes sense to be this big, then the environmental impact of putting a 36-inch pipe in, versus a 30-inch pipe, there’s no different environmental impact. But the ability of the plant to produce water in the future—there is a difference. And I think that’s what’s being debated right now, and very soon the PUC will have a public process about how to do that. The PUC is looking at the project that we proposed, and they are talking to everybody about how big a regional plant might be. They’re looking at the great big picture and where they come down, we don’t know. That’s the water-supply piece.
Put yourself in my position. What do you do? Do I sit and say, well, let’s let the county work it out. When the County works it out, we’ll come on board. When the cities get it together, when the water management district gets it together…you’d say, “C’mon Leonard, you’re the water guy around here, why don’t you do something about it.”
Do we say, oh my God, we’ve got so many things going wrong we can’t do it? Or do we say, well, here’s a proposal, it’s based on a PUC study, we’re doing it through the PUC to try to minimize the local political problems and give it a broader cast. We’ve done outreach. People who live in San Francisco are making the decision about whether that outreach was too great. And that’s the context of what we’re planning here. Water is controversial. The company is controversial. The relationship of any water company to the community has been controversial for 100 years. And at the end of every day, people go home and their water works. I’m in business to make sure that happens forever. We’re in a zero fail business. We’re in a zero-defect business and we’re serving 40,000 customers through 100-year old pipes with 100 pump stations and 100 tank sites and we do it. The average person isn’t out of water—ever. How do you sustain that and do it in a community that is incredibly water wise and incredibly water active? That’s why at some point when we make decisions that don’t feel quite right to folks, we say, look, we do have your interest in mind. Getting you water, everyday, consistently, is our interest. And right now, that interest is threatened by the regulatory problems that we have.
We’re coming along and saying, we prudent water managers, we see that paying for this as it goes, and paying ahead to reduce rate shock is a better strategy than waiting until it’s upon us, in rate base, and becomes crushing for people who weren’t prepared for it. It’s not like people are going to take this money and put it aside in an account and say, this is going to be my added bill, going forward.
No body is saying don’t do it. No body is saying don’t build a new water supply, But you don’t build a new supply without spending money. It’s a huge amount of money for a community of this size, and again, it can be very unsatisfying because it isn’t freeing them. Our proposal doesn’t free them from water restrictions.
WEEKLY: It is an expensive project, water politics are always controversial, Cal Am, as a private company, is controversial, and then the fact that Cal Am is up for sale. Doesn’t that create at least problems in terms of how it’s perceived by the community?
LEONARD: Sure. It’s funny. We’re in a business of steel and concrete and yet perception drives it all. I can tell you, I will tell you to your face that nothing we are doing in this project has anything to do with the sale. This is a project that…One of the things I like about this job in Monterey is that issues on the ground here have far more magnetism to me, and to the staff here, and the focus of what we do here, then the overall issues with the company. We’re driven by regulations and we’re driven by customer needs here. The corporation has things that it demands of us as well; they are not nearly as strong as the magnetism of the customer and the regulatory structure we’re in right here. So this is being driven by best practices we could think of to make this work. The sale of the company, you probably know more about the sale of the company than I do. I know very little about it. They say it’s going to happen; when it does, it will happen, and we’ll go forward but this is, to my complete understanding, has nothing to do with the sale. I think people have made way too much about our ownership. Since Del Monte owned this company, it’s been controversial. And I’m not sure why. People weren’t’ worried about the Carmel River 100 years ago, but it’s been rates, service, what I can do here is, we hope the service is good. Rates are problematic because of this major capital liabilities and relatively small rate base to pay for it. But, at the end of the day, if you get your shower, your kids gets washed, dinners get made, the lawn gets a little bit of water to keep it yellow as opposed to gray, then we’re probably done a pretty decent job. Can I continue to do that? I think that the rate hikes we have proposed make us stronger moving forward. Some customers probably have a different feeling about that. The PUC DRA, who are ratepayer advocates, who are pretty much paid to push back on us…it will go back to commissioners who understand the need to balance rates and public needs and they’ll have the last say. We just made proposals based on our best judgment and that’s why this public participation process.
We’re talking about trying to solve a 10-year old problem, today. How do you do that, moving forward, we obviously think that having a strong fiscal basis for our project is the best way to do that. Some customers disagree, some don’t’ have an opinion. The PUC will ultimately make the decision.
I’m a ratepayer. It’s not like I’m going to be immune from it.
The question is, are we starting this 10 years too late? We knew we needed something. If the county doesn’t’ pull it together, if the water management district doesn’t pull it together, if Pajaro Sunny Mesa with it’s 800 customers doesn’t pull it together, it Marina Coast doesn’t’ pull it together. We hired on to be tough and we hired on to deliver water to folks. Being unpopular is not my favorite thing, but you know what, I’m 24-7, 365 on to infinity, that’s they way you’ve got to look at this. 24, 7, 365m we’ve got that down pretty cold. It’s that on to infinity piece that we’re working on, and it’s not going to be cheap. It sure as hell isn’t going to be easy. But it’s absolutely necessary. A couple of dry months and this place will be in agony. I don’t want to see that. If I can get this plant built or something equivalent to it built in the next few years, we reduce the chances, There will be water supply shortage in this place and the sooner we get something to protect ourselves from it, the better off we’re going to be. We’re willing to debate this while we move forward, but we’re going to move forward.