Why Did it Take 32 Years for Montecito to Cut a Desal Deal with the City of Santa Barbara? (Part II)

The story of desalination in Santa Barbara dates back 32 years. Its plot, with all its twists and turns, rivals the movie, Chinatown, a tale of manipulation of water in Los Angeles in the 1930s.

Faced with the threat of drought in the late 1980s, the City of Santa Barbara, the Montecito Water District and the Goleta Water District formed a regional partnership to jointly address the threat of “no water” in all three communities.

In 1992, Montecito, Goleta, and Santa Barbara opened a regional seawater desalination plant in Santa Barbara with a production capability of 7,500 AFY (acre feet per year), expandable to 10,000 AFY. The cost was $34 million, split proportionately between the partners on the basis of entitlements: 1,250 AFY for Montecito Water, 3,069 AFY for Goleta and 3,181AFY for the City of Santa Barbara.

Upon completion, the desal plant operated for only four months – between March and June of 1992 – before it was mothballed when abundant rainfall that year and ensuing years relieved the drought. When the threat disappeared, the desalination plant was idled. The districts and the City paid off the $34 million cost in full during the initial 5-year contract period, with the City share tallying approximately $14.5 million, according to Santa Barbara.

The City Goes It Alone – Montecito and Goleta Call it Quits

Montecito and Goleta elected NOT to renew their interest in the plant after the initial five-year contract period, leaving the City to bear the modest costs of standby operation. Components of the plant were sold to Saudi Arabia to recover standby costs. An Environmental Impact Report was certified on May 24, 1994.

 On July 5, 1994, the City elected to make the idled desalination plant a permanent part of the City’s water supply portfolio. On October 15, 1996, the California Coastal Commission issued a Coastal Development Permit to the City for a future permanent desalination facility with a maximum capacity of 10,000 AFY. The plant remained on standby mode from 1994 until it reopened in 2015.

The Year 2013: Montecito Chooses Higher Water Rates

In 2013, a panicked Montecito Water District (MWD) faced the prospect of an extended drought with limited options and no Urban Water Management Plan (UWMP) since 2005. The solution was to pass massive rate increases onto MWD ratepayers in August 2013. Water rates soared by a whopping 16% in the first year, followed by four annual increases of 7.4% for each of the next four years. But the bad news didn’t stop there.

The Year 2014: Montecito Chooses Mandatory Rationing

Six months later in February 2014, in response to Governor Jerry Brown’s call to reduce water use by 20 percent, the 2014 Water Board imposed arbitrary and mandatory monthly rationing quotas on every water user in Montecito and Summerland. Out of all 537 special water districts that own and operate public water systems in California, MWD was the only Water District that opted for a mandatory water-rationing plan.

The unpleasant result was that under monthly rationing, any customer with a one-time leak in their water line or irrigation system not only paid the elevated rates but was assessed $30 per hcf (hundred cubic feet) penalty for the first violation and $45 per hcf penalty for subsequent violations. Scores of customers appeared each month at Water Board hearings protesting their “leak charges.” Nevertheless, the District pick pocketed the community for $3 million a year in leak charges.

The Year 2015: Montecito Imposes a Temporary Water Shortage Emergency Surcharge

In April 2015 with revenues still falling, the 2015 MWD Board, imposed a “temporary” water shortage emergency surcharge of up to $4.16 per hcf to align revenue with falling sales and to purchase supplementary water during drought years, a charge that remained on the books until its sunset this year in July.

On July 21, 2015, in response to its own severe drought conditions, the Santa Barbara City Council voted unanimously to reactivate the Charles E. Meyer Desalination Plant. The City Council awarded IDE Americas, a design/build/operate contract to re-commission the city’s desalination plant.

Effect of Water Rationing on Montecito

In 2015, with mandatory rationing in place, Montecito, water sales fell precipitously to 3,331 AFY, a 49-percent drop from 2008 water sales of 6,518 AFY. Conservationists cheered this apparent 50-percent reduction in Montecito water use.

Conservation or More Water Wells?

What really happened were two things: one “good,” and one “not so good.” The good thing was that Montecito residents dramatically cut water usage. New, more efficient irrigation systems were installed to replace sprinklers. Desert landscaping boomed. Golf courses switched from Rye Grass to Bermuda, reducing water use some 30 percent. Lawns were ripped out. Montecito went from green to brown. Local coast live oak trees died from lack of water and so did other landscaping. Renegade water trucks plowed the streets of Montecito, selling purloined water to panicked customers.

The “not so good news” was that many large water users, threatened by rationing restrictions, drilled private water wells to avoid the loss of millions of dollars invested in green landscaping. The number of new wells is unknown, but the 550 known producing wells, plus an estimated 730 permitted, unpermitted, and abandoned wells, had the unintended consequence of sticking hundreds of new straws into Montecito’s shrinking, low-level aquifers.

Large well users who deserted MWD, were careful to retain MWD meters for low-volume household water, while still holding the option to pick up the telephone and demand more MWD water for their precious landscaping any time the underlying water table, or their wells, went to mud from overuse. Meanwhile, they contributed nearly nothing to maintaining the increasingly expensive fixed costs of the State Water System, or to providing water to protect our community from repeated wildfires.

The Year 2015: Renewed Interest in City Desal

Battered by Board decisions to impose rationing, and after futile efforts to design and build their own desal plant in Montecito, a pair of former MWD Directors, both trial lawyers, approached the City in 2015 to explore a partnership deal for desal water. These two talented lawyers descended on the City Water team, largely composed of engineers, and immediately fell into the legal quagmire of who would bear what liabilities.

City negotiators, whose #1 priority was to craft a jointly-agreed-to term sheet, argued that legal points could be negotiated later, once a business deal was in place. A Memorandum of Understanding was delivered by the City to MWD on September 22, 2015 stating that “time was of the essence and it was necessary to conclude development of an Agreement by January 1, 2016.”

In October 2015, after months of haggling, the City delivered a Preliminary Term Sheet to MWD with instructions to respond by December 31 to move negotiations forward.

With some rainfall and a prediction of a wet Winter-Spring, MWD General Manager Tom Mosby, at the direction of his Board, stalled negotiations with the City. His December 31, 2015 response cited a “need for more studies and a need for more financial consultants.” His letter concluded “Best wishes to all in 2016 and may ample rainfall fill our reservoirs (and cups) this winter.”

The Year 2016: A Year of Stalled Negotiations with the City Over Desal

Rebecca Bjork, City Public Works Director, responded to Mosby on January 19, 2016 noting that, “We seem far apart on many issues, including the basic structure for the sale of water to the District… The District has been unable to even identify the quantity of water it needs.”

 The City mandated that talks with Montecito could not begin again until MWD paid upfront, non-refundable fees of $528,000 in order to start renegotiations without wasting City time or City costs. The first payment of $193,594 was delivered to the City in September 2016 to restart negotiations. Restart payments included a portion of the costs for the City’s Carollo Engineering studies, IDE desal design costs, legal costs, permitting costs, hydraulic modeling, conveyance pipeline design and City staff administrative costs. In addition, MWD spent approximately $615,000 in consulting fees, legal fees and staff time to explore its own desal plant in fiscal 2015-2016.

The Year 2016: Changes in Water Leadership

In February 2016, Water District Manager Nick Turner replaced retiring general manager Mosby. In December 2016, current MWD president Floyd Wicks, a water engineer and industry veteran, and Tobe Plough, a business consultant, were elected as new directors to replace appointed Director Charles Newman and retiring Director Jan Abel.

Two years later, in 2018, three additional new directors – the financially savvy Ken Coates, the politically savvy Cori Hayman, and the business-savvy Brian Goebel – joined the MWD Board, completing the change from cozy, appointed directors to elected directors responsible to customers.

The Year 2017: What Changed with the New MWD Board?

First off, at the insistence of newly elected Water Directors Floyd Wicksand Tobe Plough in early 2017, the District wrote and adopted its long neglected, state-required, 2015 Urban Water Management Plan (UWMP). The District committed in writing to the State that it would set a goal of increasing local, drought-proof water supplies to 85 percent of total supplies by the year 2025. Additionally, because the previous Board had neglected to file the mandatory State Urban Management Plan in either 2010 or 2015, MWD found itself out of compliance with State mandates and therefore ineligible for state water grants.

The new UWMP established new water priorities: (1) negotiation of a long-term water supply agreement with the City of Santa Barbara; (2) exploration of groundwater banking opportunities, and (3) pursuit of an agreement with a reluctant Montecito Sanitary District (MSD) Board for a joint recycled water agreement that met the legal restrictions wherein MWD would be the distributor and seller of recycled water while Montecito Sanitary (MSD) would be the producer of higher-quality recycled water.

Year 2017: Santa Barbara Goes It Alone

In May 2017, startup testing at the Santa Barbara desalination plant was completed and the City started distributing 3,125 AFY of desalinated water into the City’s water system. 3,125 AF of water represents about 30 percent of the City’s water demand of 11,000 AFY. Desalinated water joined surface water from the Cachuma and Gibraltar reservoirs, groundwater, State Water, imported water, recycled water and conservation in a balanced City water-supply portfolio.

Just as important, the City was permitted by the State and the Coastal Commission to add an additional 4,375 AF of desal capacity at a lower cost at any time it chose, simply by adding additional membrane trains. That provides the cushion to service Montecito’s 1,430 AFY requirements when the City runs low on its available water supplies.

The capital costs to reactivate the desal facility were $72 million, more than twice the cost of the original plant in 1991. The $72 million cost was financed over 20 years with a low 1.6 percent interest rate state loan, which equates to $4.2 million per year in debt service. In 2018, the City was awarded a $10 million grant from the Department of Water Resources, which, if accepted by the City Council, significantly reduces the overall cost of the project.

Annual operating costs are estimated at about $4.1 million at full production and about $1.5 million in non-operation or standby mode. The plant could be put in standby mode during certain periods to reduce operating costs, but the WSA requires the desal plant to remain in a condition capable of producing water within 10 days.

The plant design includes a screened ocean intake structure, using wedge wire screens made of durable copper-nickel alloy with one-millimeter openings to minimize marine life entrapment and impingement; diluted and diffused brine discharge; and high-efficiency pumps and motors to reduce the plant’s overall electrical power demands.

Desal Deal Resuscitated. Montecito Wants Back in The Game

It was not until the election of Floyd Wicks to the MWD Board in December of 2016 that talks with the City could safely resume. Wicks, a respected and seasoned water executive, was able to approach the City with the skills and mindset of an engineer to restart the lengthy negotiations that led to a preliminary agreement, and now final approval.

The Advantage of Ownership

City negotiator Josh Haggmark and his team have crafted a beautiful Agreement for the City, not simply to recover modest costs of adding new desal trains to serve Montecito’s water needs, but rather to recover 46 percent of all the hard and soft costs incurred by the City since 1992, including all legal, permitting, design, construction, operations, maintenance, chemicals, supplies for the plant, plus 65 percent of the cost of the City’s conveyance pipeline to transfer water from the desal plant on the coast to the Cater Water Treatment Plant north of the Santa Barbara Mission.

The price of water is based on the theory that the City is supplying Montecito with 1,430 AFY out of its current production of 3,125 AFY of desal water, which computes to 46 percent of all desal costs charged to Montecito. The source of water supplied to MWD is totally at the City’s discretion but will always include a portion of desal.

The Desal Deal is Done… An Historic Regional Partnership

In March 2018, the MWD Board voted to support restarting negotiations with the City. Two months later, in May 2018, the City Council authorized its water staff to execute a new Funding Agreement with MWD and resume negotiations.

In January 2019 the Santa Barbara City Council and the MWD Board approved a Term Sheet and directed staff to draft a Water Supply Agreement (WSA) with MWD.

The time to act, not yak, arrived. On June 23, 2020, the MWD Board unanimously approved the WSA with the City. Seven days later, the Santa Barbara City Council voted unanimously to ship 1,430 AFY from the City’s drinking water supply to Montecito every year for the next 50 years, rain or shine. That represents 40 percent of Montecito-Summerland current needs.

In return, the Montecito Water District has agreed to effectively fund 46 percent, or $33 million, of the City’s $72 million desalination plant through 2072, plus interest and a share of operation and maintenance costs, unless the plant is expanded. Contract signing is expected in July or August 2020. First water deliveries will begin January 1, 2022.

Regional partnerships bring communities closer together. Let’s hope that works for this Water Supply Agreement after 32 years in the making.