The Great Santa Paula Chloride Caper

Santa Paula Councilman Bob Gonzales wants the city to stop its “unethical” arbitration proceedings against Santa Paula Water over chlorides in the city’s water. Stakes are high in citrus country. Who will prevail?

PERCSantaPaulaSanta Paula Councilman Bob Gonzales wants the city to stop its “unethical” arbitration proceedings against Santa Paula Water LLC over chloride in the city’s water. But City Manager Jaime Fontes has a plan to use the issue to buy back the privately financed Santa Paula Water Recycling Facility at a multimillion-dollar discount. The plant’s owners are not about to play along with Fontes’ predatory tactics. Who will prevail?

There’s salt in the water in Santa Paula, California, “the Citrus Capital of the World,” and that’s not good for agriculture, the soil it grows in, or any living thing in the Ventura County city of 32,000 that uses water. Now an arbitrator will determine who will pay for it, the City of Santa Paula or Santa Paula Water LLC, the private subsidiary set up to run the city’s almost four-year-old water recycling facility.

In July 2013, the city initiated a claim against Santa Paula Water LLC (SPW) for failure of the facility to treat chlorides a/k/a salts. This was a stunning turn of events in a short period of time for the groundbreaking $62 million wastewater project, especially since Santa Paula Water doesn’t dispute that the facility doesn’t treat or remove chlorides—because it was never contracted to remove them at the time the contract was awarded to Costa Mesa, California-based PERC Water to build the facility in 2008.

Santa Paula City Manager Jaime Fontes, hired in 2010, sees 2008 differently. Wrote Fontes in a Sept. 20, 2013 city press release announcing the commencement of a “dispute resolution action against Santa Paula Water, LLC, to determine its liability for the treatment and removal of chlorides at the Santa Paula Water Recycling Facility (SPWRF)”:

“The 2008 Design, Build, Operate and Finance (DBOF) Agreement with Santa Paula Water, an entity owned and controlled by Pacific Environmental Resources Corporation [PERC Water] and Alinda Capital, required the SPWRF to meet all requirements set forth by the Regional Water Quality Control Board and a Court Order issued to conclude a lawsuit against the City by the State Water Resources Control Board. These requirements mandated that the discharge from the SPWRF could not contain chlorides at levels that exceeded 100mg/l.

“The SPWRF does not now and has never met the 100mg/l criterion. Because of that failure, the City faces significant penalties assessed by the State of California. To fix the problem will cost millions of dollars.”

Located about an hour’s drive north of Los Angeles, the citrus-belt city has been struggling with high chloride levels for many years. A high content of chlorides in groundwater and surface runoff poses a risk to water quality, and needs to be carefully monitored and regulated. In 2006 the city made a conscious decision to solve the chloride compliance issue by source control. They had a plan to reduce chloride at the source of the water, not at the recycling facility, but before the wastewater entered the plant, and, additionally, by buying back residents’ brine-discharging home water softeners, identified as the main salt-producing culprit.

This explains why the city directed all the bidders for the plant contract, during the Request for Proposal (RFP) stage, not to include facilities to treat chlorides at the wastewater plant. The city didn’t want to pay the higher cost of treatment downstream at the plant when it was more cost-effective to treat it at the source.

So it’s been generally well known that the still new-looking Santa Paula Water Recycling Facility, which went fully on line in May 2010, wasn’t built to treat chlorides. Since it wasn’t built to treat chlorides on the city’s direction, what does the city hope to gain by blaming the chloride problem on the owner of the plant they approved five years ago?

In a chilling example of the seismic shifts than can occur almost overnight in local politics, and their disruptive impact on large projects, the city administration in Santa Paula has changed since those good old days when the plant was sought and built from 2007 to 2010. There is a new city manager and city council majority in power now, and they are implementing a five-year option in the DBOF contract to buy back the facility from the private owners and bring it into public sector ownership, because they think they can do it cheaper and save the city money. But it’s safe to say that’s probably not what’s actually going to happen in Santa Paula. Not by a long shot.

Santa Paula City Manager Jaime Fontes
Santa Paula City Manager Jaime Fontes

‘Stop the Arbitration’

Rather than deal with the city’s long-standing chloride problem separately, as the city said it was going to do in 2006, City Manager Fontes—who hastily left a similar post in Nogales, Arizona, to take the job in Santa Paula—has chosen a seemingly desperate strategy that places the city at potentially greater financial risk: Pin the cost of fixing the chloride issue, and any Regional Water Board fines that may result from accumulated non-compliance, on the private owners of the facility, Greenwich, Connecticut-headquartered Alinda Capital. Then try to buy back the facility for millions less by using arbitration to negotiate a reduction of the purchase price previously agreed to by the city, reported to be around $75 million.

And never mind that tied into the buy-back price of the facility are deferred payments with interest, municipal investors and pension fund investments, some of the benefits of contracting with Alinda/PERC in the first place. Dissolving a local and global network of financial partnerships and having to reestablish new ones hasn’t deterred Fontes from plunging ahead.

“Using the litigation as a means to negotiate and beat down the price … is not right,” said Santa Paula Councilman Bob Gonzales, one of two council members on the short end of the council’s 3-to-2 split vote for arbitration.

“It’s a waste of money, time and effort,” he said. “The chlorides were to be dealt with as a separate issue. Our council is thinking it can get something for almost nothing (through dispute resolution), and that’s to have PERC build a chloride system, or/and reduce the value of the existing facility. But we could build (the chloride system) out of our own money.

“The ethical thing to do would be to stop the arbitration issue, save some of that money and put it towards a study to start moving forward with a system where we can deal with the chlorides,” Gonzales said.

Current City Manager Fontes was not part of the awarding of the original project, the negotiations or construction. Yet he apparently believes he can circumvent the city’s contract with Santa Paula Water, which predates his arrival in Santa Paula, by devaluing the plant and lowering the price through the arbitration process.

“Any effort, energy and time would be better spent working on the solution versus trying to go to court and arbitration and getting something for nothing,” said Gonzales. “I’m not sure where the money’s coming from for the arbitration, but someone’s got to pay … for hiring attorneys to represent us.”

Gonzales, who was Mayor in 2008 and again in 2012, can’t see how Santa Paula Water will end up having to pay a dime to the city for what has always been the city’s problem.

“It’s hard to imagine SPW paying anything coming out of this arbitration. It’s not fair. Nothing against attorneys we have here, but the only people that are going to make money out of this are the attorneys.

“It’s going to take a long time to get through this thing, and I believe the majority of the city, the majority of the council, have been given direction to go in this direction (by Fontes), and I think it’s unethical.

“I can’t see where there are any winners,” Gonzales said.

The city claims Santa Paula Water, the limited entity set up to run the facility in a joint venture with Alinda/PERC, is in breach of contract because they didn’t treat chlorides, which wasn’t an issue when they built the plant, only now when the city wants to buy the plant. When the city, under one administration five years ago, contracted Alinda/PERC to finance and to build the plant, Santa Paula Water was told they didn’t need to worry about chlorides. The October 2007 RFP requested it that way:

“It is not anticipated that additional treatment facilities will be included in the WRF to remove chloride, sulfate and boron.”

And in February 2011 the city-hired consultant, Carollo Engineers, signed off on it:

“…the SPWRF is meeting all of the effluent limits listed in the permit, except for chloride. However, SPWRF was never intended to remove chloride.”

A grand jury later investigated and in a June 2013 report determined that the city failed to address chloride in their RFP:

“The Grand Jury found that the high levels of discharged chlorides which have plagued the Santa Clara River and the local agriculture was not addressed in the original proposal or contract.” 

The plant was never intended to treat chlorides and therefore it doesn’t.

Fontes publicly acknowledged in his September 20 press release that millions in accumulated fines from the Regional Water Board were all but in the mail; he seemed to be almost inviting them. Because chloride in the water isn’t really the central issue for Fontes; it’s the facility he’s after. Using the fines, or the imminent threat of them, as a pressure tactic, the city’s attorneys hope to shift the blame, or even a portion of it, for the chloride issue on to Santa Paula Water. Then, using arbitration to leverage a cheaper price, they city intends to buy back the facility at a bargain for what it failed to do by design: treat chloride.

Whether arbitration is stopped before it begins, as Councilman Gonzales suggests it should, or continues unabated, Santa Paula Water’s attorneys aren’t going to be rolling over for the city’s chloride caper. Why should they? The key documents support SPW. And some might say that trying to get something for nothing is, for all intent and purposes, fraud.

‘Wild Goose Chase’

In his September 20 press release, Fontes presented his case, alleging that the Santa Paula Water Recycling Facility, “owned and controlled by Pacific Environmental Resources Corporation and Alinda Capital … does not now and has never met the 100mg/l criterion. Because of that failure, the City faces significant penalties assessed by the State of California. To fix the problem will cost millions of dollars.”

Pacific Environmental Resources Corporation (PERC Water) is not a party to this arbitration, but like most press releases, Fontes’ pronouncement contained an ample dose of hyperbole, spin, omissions and over-the-top propaganda.

“What I found to be quite disappointing, though not particularly surprising, were the misstatements of fact and the resulting level of innuendo the press release contained,” wrote Marsha Rea, a columnist with the Santa Paula Times, and a longtime keen observer of local politics, on October 4, 2013.

“Mr. Fontes is correct in his assertion that the city has never been in a state of compliance with the chloride mitigation requirements, but we knew this already; and remains at risk for hefty fines again today, which we didn’t know.”

It’s been well known that the facility didn’t treat or remove chlorides because it was never designed to meet that need. When the city issued RFPs to build the plant, it stated that the city “did not anticipate that additional treatment facilities will be included to remove chlorides,” eliminating chlorides removal as a requirement for the new plant.

“It makes one wonder what is the underlying agenda Mr. Fontes is driving,” wrote Rea.

When construction of the plant was complete, the city hired Carollo Engineers to evaluate the status of the plant, and in February 2010 Carollo stated that “all the conditions of the DBOF [design, build, operate, finance) agreement have been met for the City to issue Final Acceptance to PERC Water,” the last step in meeting the final completion requirements of the DBOF agreement.

“So how/why does Mr. Fontes hop, skip or jump from the Carollo memo saying everything’s been done according to your plan in 2011, to this new gambit of finger pointing at the builders who did pretty much exactly what was asked of them?” asked Rea.

Part of the reason for choosing Alinda/PERC for the project was the financial flexibility it offered the city. The city didn’t have sufficient funds to build the project, and the Regional Water Board mandated a deadline for compliance. Lower upfront costs would allow the city to deal with the chloride issue separately. All they had to do was follow through on their buy-back program for salt-discharging home-water softeners, but the city dragged its collective feet, and have up to this day.

“There has been absolutely no change at all in the chloride situation here in Santa Paula,” states Rea, “and thus here we are again facing large fines for unacceptable chloride levels in our waste water discharge (reminiscent) of 2002-2003. Have we seen this movie before?”

According to Rea, Fontes has been saying for years that the city is about to issue bonds to buy back the treatment plant. However, she opines, “There are no bond underwriters that I know of who will participate in issuing new bonds with the potential of several million dollars in [Regional Water Board] fines hanging over the head of the borrower.”

So why is Fontes striking out on a diversionary mission that can only further drive up the cost of wastewater to already-surcharged ratepayers? Why has Fontes chosen the high-wire act with no blindfold, no safety net?

Rea sees a malevolent, takeover-style strategy at work behind the scenes. “Get Alinda Capitol, who now owns the water treatment plant, into protracted, although frivolous, litigation and try to strong arm them through public pressure into reducing the previously agreed to price for the sale of the plant back to the city.”

Rea is concerned that Fontes’ reckless course of action could result in a substantial negative impact “on all of the counties, municipalities, school districts, retirement funds, etc. who invested through Alinda in our facility, and who were led to believe they would have a reasonable rate of return over time.”

In the end, however, Rea is confident that Alinda’s attorneys will “make Mr. Fontes look irrelevant and foolish, while he spends lots of the City’s precious money on a wild goose chase that will eventually come to naught.”

That promise of failure still doesn’t quite explain Fontes’ apparent obsession with buying back the wastewater plant at a discount to which he and the city are not entitled, not by contract or ultimate responsibility. It has all the appearance of a vendetta by someone who would waste millions of taxpayer dollars to prove he can get what he wants for almost nothing. Such arrogance won’t do anything to help Santa Paula residents facing escalating sewer and water rates. It will only rub more salt in their wounds.

“It is unfortunate that the designers of this facility, who in their contract said they would deal with this and other requirements, just failed to do so,” said Fontes in his lopsided press release. “They were supposed to be the experts and that’s why the City contracted with them. They signed on the dotted line and accepted the responsibility to make sure that the City was going to be in compliance. Now the City is left to deal with this issue.

“When the next round of fee increases occurs in a couple of months as a result of this agreement entered in 2008 (with Alinda/PERC), we want the people of Santa Paula to know that we are fighting to get them rate relief.”

It’s hard to imagine more than a few in Santa Paula believing a word of Fontes’ “fighting for rate relief” fear-inspired half-time speech, except for the “fee increase” part. And that’s not good news for Santa Paula.