A water credit transfer approved for a developer by the City of Monterey and the Monterey Peninsula Water Management District has been struck down by an appellate court, which ruled that the city’s and the district’s reliance on an exemption from environmental review was faulty.

State lawmakers created the district in 1977 because of ongoing water shortages in the Monterey area. The district serves eight jurisdictions, including the City of Monterey. In 1993, the district began a program in which water credits could be transferred from an existing commercial use to an expanding commercial use in the same jurisdiction. In 1995, the district changed the program to permit transfers from a commercial use to the jurisdiction’s water allocation.

The program subjected water transfers to a 15% reduction, meaning that only 85% of water use capacity could be transferred. The district assumed this provision would result in a net decrease of water use. But studies by the district in 2000 and 2001 suggested the program caused an increase in actual water use, although it is unclear why this occurred. The district discontinued the program in 2002 but reinstated it the following year in response to a lawsuit.

In 1994, an 11,000-square-foot commercial building complex on Foam Street in Monterey was demolished, and a water transfer credit of 0.789 acre-feet was approved. In 1999, Foursome Development received a five-year extension of the water credit. With the extension’s November 1, 2004, expiration date looming, Foursome sought to transfer the water credit to the city’s water allocation “to be held in reserve” for the developer.

The city found the 2004 transfer to be categorically exempt from the California Environmental Quality Act and approved the proposal. Although environmental groups protested that the transfer would have environmental impacts and that the transfer violated the district’s own rules against “banking” credits, the water district board voted 4-2 to approve the transfer in October 2004. The environmentalists then went to court, losing a round in Monterey County Superior Court. A unanimous three-judge panel of the Sixth District Court of Appeal, however, ruled that the opponents were correct.

The city — the “lead agency” for CEQA purposes here — found that the water credit transfer was exempt under CEQA Guidelines § 15032. The city relied on Class 2 within that section, which exempts “replacement or reconstruction of existing structures and facilities where the new structure will be located on the same site as the structure replaced and will have substantially the same purpose and capacity as the structure replaced.”

“On its face,” the court ruled, “this exemption does not apply to a water credit transfer, which is neither a structure nor a facility.” Furthermore, the court ruled, all the city had as evidence of a replacement structure was a letter from Foursome that mentioned a possible addition to an existing office complex elsewhere or a new structure. No application had been filed.

The city, water district and developer argued that the transfer of such a minor amount of water could not possibly have a significant environmental effect. But the court said the size of the project “is not an element of a Class 2 exemption.”

The court then considered the actions of the water district, which was the “responsible agency” under CEQA. A responsible agency may rely on the lead agency’s environmental findings. However, because the court rejected the city’s categorical exemption, the water district no longer had substantial evidence for its finding that the water transfer would not have an adverse impact.

The court also concluded that the district violated its own rule, which requires the board to consider the cumulative impacts of water credit transfers. Other properties also were facing the expiration of approved water credit transfers and might be the subject of proposals similar to Foursome’s, but neither the district’s staff nor the board considered that evidence, the court determined.

The district and Foursome argued the transfer could not possibly have a cumulative impact because only 85% of water capacity could be transferred. In rejecting this argument, the court pointed to the district’s own studies, which determined “the water transfer program had not resulted in the anticipated savings … and, in some cases, may have resulted in an increase in water usage.”

The Case:
Save Our Carmel River v. Monterey Peninsula Water Management District, No. H029242, 06 C.D.O.S. 6735, 2006 DJDR 9514. Filed June 23, 2006. Modified and ordered published July 21, 2006.
The Lawyers:
For Save Our Carmel River: Michael Stamp, (831) 373-1214.
For the district: David Laredo, De Lay & Laredo, (831) 646-1502.
For Foursome Development: Charles Olson, Sanger & Olson, (415) 693-9300.