[On City Letterhead]

September 29, 2012

VIA Hand Delivery and Rob MacLean, President California American Water Company c/o 511 Forest Lodge Road, Suite 100 Pacific Grove, California 93950 RE: Proposal to Cal Am for Public Entity Participation in Desalination Project

Dear Mr. McLean: On August 29, 2012, Administrative Law Judge Gary Weatherford issued a ruling asking that Cal-Am seriously consider in good faith any public agency proposal for direct participation in the MPWSP made to it no later than October 1, 2012. That ruling indicated that it was reasonable for Cal-Am to consider such proposals to the extent that they are feasible and sufficiently developed to allow implementation in a timely manner. The Peoples Moss Landing Water Desal Project (The Peoples Project) has significant advantages over all other proposals. Because of the state mandated cutbacks on water supply from the Carmel River, timeliness of any proposal is critical. Only the Peoples Project addresses these concerns. First, there is significant infrastructure in place, including seawater intake and discharge piping, on-site water storage tanks, building space, and electrical service. Second, the Peoples Project is already permitted to take and discharge 60 million gallons a day of seawater. No other proposal has this same entitlement, which is critical for this environmentally sensitive project. Third, the City of Pacific Grove has committed to the Peoples Project, making it the only project with a public agency partner as required by Monterey County Ordinance 10.72. Put simply, the Peoples Project has significant infrastructure, permitting, and legal advantages over all other proposals. The City of Pacific Grove asks Cal-Am to participate in the Peoples Project.

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I.

Summary of Proposal for Public Participation

The City of Pacific Grove proposes the following structure for joint participation with Cal-Am in the Peoples Project. The City of Pacific Grove, and its agents, would assume primary responsibility for: 1) 2) 3) 4) 5) Land and Infrastructure Acquisition; Design, technical specifications, and construction of Desal facility; Obtaining financing; Obtaining all necessary permits; and Environmental Review;

Cal-Am would assume primary responsibility for: 1) Sale of water to consumers; 2) Construction of necessary water delivery pipelines; 3) Operation of completed Desal facility; Additionally, Cal-Am would agree to join, assist and fully support the City of Pacific Grove in obtaining a side-by-side review and comparison of the Peoples Project and CalAms currently proposed Marina Desal Project before the CPUC.

II.

The Peoples Project Is Sufficiently Developed, Feasible and Capable of Timely Completion

Attached hereto, as Exhibit 1, is the Peoples Project September 2012 project update. This update illustrates that the Peoples Project is sufficiently developed, feasible, and capable of timely completion. A. Developed Project: Infrastructure and Permits

The Peoples Project is literally developed. Unlike the alternative desalination proposals, the Peoples Project site has substantial existing infrastructure. The real property is owned by the Peoples Project. The site has two existing 36 seawater intakes and an existing 52 seawater outfall. The existing pipelines could accommodate intake and outfall for desalination either in the open ocean or in the Moss Landing Harbor (providing substantial flexibility during the permitting and environmental review process). The Intake Pump Station located in the Moss Landing Harbor consists of seven large pumps.

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The Peoples Project site has existing water storage capability of 45M gallons. An adjacent parcel has existing water storage capability of another 45M gallons. This massive, existing, storage capacity provides reliability and safeguards for continuous water supply to the public. The site is large enough to accommodate a solar facility to generate the power needs of the desalination plant. Alternatively, the site is immediately adjacent to a large-scale power plant. The alternative energy sources provide flexibility, redundancy, and decreased consumer cost. Like the other existing infrastructure, it also decreases construction costs and the ultimate cost to the consumers. Additionally, the Peoples Project already has a portable desalination system on-site. The site has additional critical infrastructure. There already exists 300,000 square feet of building space and 12KV of electrical service. There is a railroad spur to enable bulk chemical delivery and solids removal, reducing truck traffic. There are fresh water tanks and fresh water wells with capacity of 2,100 gallons per minute to support construction activities, plant operation, and backup systems as required by the County. Water from the Project must be piped from the project site to the Monterey Peninsula. The Peoples Project has identified easements along the railway between Moss Landing and Seaside that are owned by Monterey County and available for pipeline use. These easements link the project site with Cal-Ams delivery system in Seaside, which will provide desalinated water to the Monterey Peninsula. The Peoples Project also offers critical permitting advantages. Due to its previous uses, the project site is permitted to take and discharge 60 million gallons per day of seawater. This entitlement is not enjoyed by any other proposal and eliminates the need for new intake from the Monterey Bay Sanctuary. Not only would new intake from the Sanctuary be costly and time consuming, it is certain to raise opposition from environmental protection groups. The Peoples Project, by virtue of its current permits, would avoid a critical point of concern. Finally, the City of Pacific Grove has already committed to the Peoples Project, making it the only project with a public agency partner as required by Monterey County Ordinance 10.72. This removes a significant legal challenge to the current Cal-Am proposal.

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B.

Feasibility

The Peoples Project has been reviewed by an independent Desalination Plant Expert, Mike Mickley, P.E., Ph.D. Dr. Mickleys qualifications and his report are included in Exhibit 1. Dr. Mickley has 44 years of experience in membrane and process technology. He is acknowledged, nationally and internationally, as a leading expert on salinity management and desalination projects. In his report, Dr. Mickley concluded that there are no fatal flaws in the concept or implementation of the Peoples Project. The Monterey Water Authoritys technical advisory committee (JPA-TAC) has determined that the Peoples Project has less risk and is more feasible than the project proposed by Cal-Am and the Deep Water project. SPI (Separation Process, Inc.), a consultant group hired by the JPA to evaluate the technical components of the competing desal plant proposals, released an initial report indicating that each project had risks, but no project appeared to have disqualifying technical specification risks at this juncture. SPI strongly recommended that each of the proposed desalination plant projects be simultaneously evaluated in a single forum, with a uniform set of criteria. (Exhibit 2). Kris Helm, another consultant hired by the JPA to evaluate the competing desalination projects also strongly recommended to the JPA-TAC Committee that each of the proposed desalination projects be reviewed simultaneously in a single forum. He identified numerous benefits and justifications for simultaneous review. He also indicated that, in this instance, an open water intake may be preferable to Cal-Ams proposed slant well intake mechanism. C. Timeliness

The Peoples Project projects that it can obtain water delivery to consumers by May 2016. SPIs independent report to the JPA concluded that the Peoples Project could be completed by January 1, 2017 from a design and construction perspective. The risk and uncertainty of timely completion of each of the desal projects stems from (i) potentially insurmountable gate-keeping aspects of some projects; (ii) delays involving environmental review, (iii) permitting delays and (iv) potential litigation. Because the magnitude of these timing risks, as to each project, cannot be fully known at this time and because of the short period of time before imposition of state mandated cutbacks on water supply from the Carmel River, it is prudent to simultaneously pursue alternative desalination projects through the permitting and environmental review process. Duplication in this regard would provide considerable benefit, in that if one project is delayed or precluded, the alternative proposal could move forward in a timely manner.

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III.

Additional Benefits of the Proposed Project

The significance and importance of a simultaneous, side-by-side and independent comparison of the competing Desalination Project proposals cannot be overstated. Such a comparison will allow decision-makers and the public to evaluate the competing proposals in terms of cost, reliability, environmental impact, feasibility and timeliness. The need for such a comparison has been clearly expressed by nearly all local governmental groups, by the public and even by the CPUC ALJ (at least in terms of cost comparison and environmental analysis). Cal-Ams support for and submission of the Peoples Project as an alternative proposal to the CPUC would protect Cal-Am and the public by providing a viable contingency plan. Even if Cal-Am strongly believes that the Monterey Peninsula Water Supply Project submitted by Cal-Am to the CPUC on April 23, 2012 is superior to the Peoples Project, reasonable minds should acknowledge the possibility that parts or all of CalAms proposed project may encounter insurmountable obstacles (be it water rights, environmental review, financing or other potential barriers identified by ALJ Weatherford). At the CPUC workshop on July 26-7, 2012, ALJ Allen noted that contingency planning was crucial for this project and has not been sufficient to date. Since then, ALJ Weatherford has required that Cal-Am intensify its contingency planning and submit a compliance report on contingency plans by November 1. Acknowledging the risk of insurmountable obstacles, and the importance of contingency planning, it seems prudent for Cal-Am to begin pursuing alternative water delivery systems now, rather than facing the prospect of starting from scratch months or years down the road. Agreeing to simultaneous review and evaluation of the competing projects would strongly signal Cal-Ams willingness to accept and promote the best desalination project, regardless of its origin or location. Such action would illustrate to the public and to decisionmakers that Cal-Ams fundamental goal is to satisfy the publics need for a technically feasible, cost-effective replacement water supply, rather than to promote primarily its own business purpose. Moreover, simultaneous review and evaluation of the alternative desal plant projects could reduce overall cost and expedite the approval process. For example, under any scenario, environmental review of each proposal will require a comparison to alternative projects. In the absence of simultaneous review, in one forum, it is likely that three EIRs will be produced, with each EIR evaluating all three proposed desal projects. By contrast, if environmental review was conducted in a single forum, such as CPUC, a single EIR could be conducted for all projects presented. The time and cost savings would be significant, and the risk of conflicting outcomes, which would open the door to litigation and delays, would be reduced significantly. The same principal applies to the review of virtually all components of

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each project, including their technical specifications, ultimate cost to the consumer, the permitting process and their likelihood of completion within the available time. In short, Cal-Ams agreement to participate in the Peoples Project, as an alternative to Cal-Ams current application, will substantially benefit Cal-Am, the ratepayers, and the governmental decision-makers. IV. Conclusion

The City of Pacific Grove requests that Cal-Am enter into a public/private partnership agreement with regard to the Peoples Desalination Project. The City of Pacific Grove requests that Cal-Am assist and co-operate in submitting an application to CPUC to have the Peoples Project evaluated simultaneously with Cal-Ams current application to the CPUC, with the Peoples Project being considered as an alternative to the currently proposed Marina Desalination Project. Finally, the City of Pacific Grove requests a prompt meeting with authorized representatives of Cal-Am to discuss this proposal, in an attempt to determine whether an agreement can be reached and formalized prior to Cal-Ams October 26, 2012 deadline for filing its compliance progress report to ALJ Weatherford. Thank you for your consideration of this proposal. Sincerely,

Carmelita Garcia, Mayor City of Pacific Grove

Attachments

cc: ALJ Weatherford