REPORT TO COUNCIL
SUBJECT
Title
Action on an Option Agreement for an Amendment to Ground Lease and Property Use Agreement Between the City of San José, the City of Santa Clara and Santa Clara Valley Water District to Allow for the Development of a Direct Potable Reuse Demonstration Facility
Report
COUNCIL PILLAR
Deliver and Enhance High Quality Efficient Services and Infrastructure and Promote Sustainability and Environmental Protection
EXECUTIVE SUMMARY
Approval of this recommendation would enable the Santa Clara Valley Water District (“Valley Water”) to secure an option for an Amendment to the Ground Lease and Property Use Agreement for the construction of a direct potable reuse demonstration facility following satisfaction of certain conditions including environmental review and execution of related amendments to agreements for cost sharing, and operation and maintenance.
BACKGROUND
The City of San José and City of Santa Clara (“Cities”) and Valley Water have historically collaborated to expand recycled water and augment the local water supply in the county. The Cities and Valley Water partnered on the construction of the Silicon Valley Advanced Water Purification Center (“SVAWPC”, more commonly known as the Advanced Water Purification Center, “AWTF”), an advanced wastewater treatment facility producing up to eight million gallons per day of purified water that is blended with treated effluent from the San José/Santa Clara Regional Wastewater Facility (“RWF”) to enhance recycled water quality distributed by the South Bay Water Recycling Program (“SBWR”). The Cities of San José and Santa Clara are co-owners of the land surrounding the RWF, and the City of San José serves as the administering agency for the RWF.
On March 2, 2010, the City of San José and Valley Water entered into a Ground Lease and Property Use Agreement (“Ground Lease”) and the Recycled Water Facilities and Programs Integration Agreement (“Integration Agreement”). The Ground Lease provided for Valley Water to construct and operate the AWTF on RWF premises and the Integration Agreement established a cost-sharing methodology between the parties to offset the cost of operating the AWTF. On October 23, 2012, the City of San José and Valley Water executed an Operation and Maintenance Agreement for the AWTF (“O&M Agreement”).
In 2023, the Cities and Valley Water executed a letter of intent to collaborate on the expansion of recycled and purified water in the county. Mutual goals were agreed upon by the Cities and Valley Water that include:
• Improvement of water supply reliability in the County
• Meeting each party’s respective shared water supply needs
• Support the production of recycled water
• Ensure that recycled water projects are ready to take advantage of current and future state and federal funding opportunities
• Develop water reuse projects ready to take in a way that protects groundwater quality
• Consider feedback from the Treatment Plant Advisory Committee that includes San José, Santa Clara, the City of Milpitas, the Cupertino Sanitary District, the West Valley Sanitation District, the Burbank Sanitary District, and the County Sanitation District 2-3.
The Cities and Valley Water have discussed the importance of supporting long-term water supply augmentation for the Cities as it relates to the new Purified Water Project. As part of developing the necessary agreements for a full-scale Purified Water Project, Valley Water support for Cities securing long-term water supply from San Francisco Public Utilities Commission (“SFPUC”) will be critical to prevent shifting this water demand to other Valley Water supplies.
Valley Water’s Board of Directors and the City of San José’s Council also confirmed, in 2023, their commitment to:
• Support a joint water reuse program to meet local water supply needs.
• Support the development of a feasibility study, demonstration facility, and institutional agreements, including lease and wastewater availability agreements.
• Support a coordinated public outreach program.
In 2024, the Cities and Valley Water entered into a Master Funding Agreement to provide for funding of Cities staff and other resources to support implementation of Valley Water’s projects including negotiation of agreements related to a purified water demonstration facility and visitors center, technical assistance, and regulatory coordination regarding reverse osmosis concentrate management and disposal.
Valley Water seeks to evaluate the feasibility of purifying treated municipal wastewater for direct potable reuse (“DPR”) as a strategy to combat future droughts that are expected to be more frequent and more severe due to climate change. Before Valley Water can build a larger permanent DPR facility, they would construct and operate a demonstration facility to inform the eventual design and operation of a larger, full-scale, permanent DPR facility to comply with state regulations. The proposed DPR demonstration facility (“DPRDF”) would include a visitor learning center for tours, education, outreach, and to garner public support. The DPRDF project could help the region to meet local water supply goals, including the goal to meet at least ten percent (10%) of the water demand in Santa Clara County through recycled and purified water.
DISCUSSION
The proposed Option Agreement for an Amendment to the Ground Lease (“Option Agreement”) would allow for the implementation of the DPRDF project at the RWF site. The City of Santa Clara, as co-owner of the RWF, also needs to review and approve the proposed Option Agreement. After meeting and conferring with the City of Santa Clara (upon request), the City of San Jose has the sole authority as to whether or not to exercise the option; however, they can only do so upon the completion of the CEQA process for the DPRDF project.
The proposed Ground Lease amendment will update the footprint of Valley Water’s AWTF lease to account for the construction and operation of the DPRDF. Concurrently, a future Microsoft development may require expansion of the North Access Road, which would require a portion of the land currently included in Valley Water’s footprint for the AWTF. Valley Water and Microsoft are negotiating the terms for relocation of the AWTF Visitor Center and related utilities as consideration for Valley Water agreeing to amend the footprint. The proposed Ground Lease will allow for modification of the footprint to either keep the AWTF Visitor Center in its current location, or an alternative footprint to allow for expansion of the North Access Road and relocation.
In addition, the exercise of the option is conditioned on execution of the proposed amendments to the O&M Agreement and Integration Agreement. The proposed amended and restated O&M Agreement would update the operational obligations of the Cities and Valley Water to account for the production and treatment of the direct potable reuse water. Valley Water would treat up to 0.5 million gallons per day (“mgd”) of their allotted 12 mgd of secondary effluent that they currently receive from the RWF for processing into potable water. Valley Water may reserve up to ten percent (10%) of the treated direct potable reuse water for bottling, education, and outreach purposes; and the remainder will be blended with tertiary effluent for SBWR distribution. Finally, this amendment adds the DPRDF onto all existing operation and maintenance procedures for the AWTF, to ensure any wastewater discharge, sampling and monitoring, and documenting and reporting obligations apply to both facilities.
The proposed Integration Agreement amendment would reset the cost-sharing methodology between the Cities and Valley Water, to account for a projected increase in future revenues from the sale of recycled water due to increase in wholesale water rates. When the Integration Agreement was first contemplated, the methodology for cost-sharing was intended to offset the cost to operate the AWTF. With the increase in potential recycled water revenues, the Cities and Valley Water will be able to fully offset the cost of operation on or about 2030 through a formula that will distribute the net revenues in a manner equitable to each agencies’ respective investment in the SBWR system. All amendments would extend the original term from 2050 to 2065.
Santa Clara City Council Approval is necessary for real estate agreements affecting the Regional Water Facility, such as the proposed Option Agreement for an Amendment to Ground Lease and Property Use Agreement. The related agreements described above (the O&M Agreement and Integration Agreement) will be executed by the City of San Jose, as the administering agency for the RWF.
Staff will return to City Council for consideration of the environmental review under CEQA. Updates will be provided to Council at major project milestones via Information Memorandums or through other appropriate means.
ENVIRONMENTAL REVIEW
The action being considered, an Option Agreement and related approvals, is a preliminary agreement conditioned on future compliance with the California Environmental Quality Act (“CEQA”). Pursuant to CEQA Guidelines section 15004(b), a preliminary agreement such as an Option Agreement that does not bind any party prior to CEQA compliance is not subject to CEQA review.
FISCAL IMPACT
There is no fiscal impact associated with the preparation of this report or amendments to the Ground Lease Agreement, O&M Agreement, and Integration Agreement. Expenses due to staff time will be eligible for reimbursement by Valley Water under the terms of Santa Clara’s existing master agreement with Valley Water and will result in no net impact to the Water and Sewer Enterprise Utility Funds.
COORDINATION
This report has been coordinated with the City Attorney’s Office
PUBLIC CONTACT
Public contact was made by posting the Council agenda on the City’s official-notice bulletin board outside City Hall Council Chambers. A complete agenda packet is available on the City’s website and in the City Clerk’s Office at least 72 hours prior to a Regular Meeting and 24 hours prior to a Special Meeting. A hard copy of any agenda report may be requested by contacting the City Clerk’s Office at (408) 615-2220, email clerk@santaclaraca.gov or at the public information desk at any City of Santa Clara public library.
RECOMMENDATION
Recommendation
Authorize the City Manager or their designee to negotiate and execute the Option Agreement for First Amendment to Ground Lease and Property Use Agreement to allow for the implementation by Santa Clara Valley Water District of a proposed direct potable reuse demonstration facility on the terms presented in a final form approved by the City Attorney.
Staff
Reviewed by: Gary Welling, Water and Sewer Utilities
Reviewed by: John Ramirez, Director, Water and Sewer Utilities
Approved by: Jovan Grogan, City Manager
ATTACHMENTS
1. Option Agreement for First Amendment to Ground Lease and Property Use Agreement and Nonexclusive Utility Easement Between the City of San José and Santa Clara Valley Water.
2. Draft First Amendment to Ground Lease and Property Use Agreement Between the City of San José and the Santa Clara Valley Water District for Advanced Water Treatment Facility.
3. Draft First Amended and Restated Agreement Between the City of San José and the Santa Clara Valley Water District for Operation and Maintenance of the Silicon Valley Advanced Water Purification Center
4. Draft First Amendment to Recycled Water Facilities and Programs Integration Agreement Between the City of San José and the Santa Clara Valley Water District.