Cities reach tentative water deal

This article appeared in the April 22, 2006 edition of The Olympian.

It's nice to learn that the three cities and the property owner are nearing a deal that will avoid the actual eminent domain taking of the parcel for its water rights. It's a bit disconcerting, though, to note that the PUD is not only left out of the deal, but that it also doesn't get so much as a mention in this story.

Assuming the deal goes through, another hurdle on the horizon is the water right change application to the Department of Ecology. There's no guarantee that the change will go through with the current water quantities in place. It could be that in changing the use from industrial to municipal that Ecology might decide to reduce the amount of water that can be withdrawn with the water rights.

This is still well worth keeping an eye on.

---

Cities reach tentative water deal
Olympia, Lacey, Tumwater would pay for all rights at former brewery site

BY KATHERINE TAM AND CHRISTIAN HILL
THE OLYMPIAN

The county’s three largest cities have reached a tentative agreement with the owner of the former Olympia brewery to pay as much as $12.3 million for all the property’s water rights.

The agreement includes supplying as much as half the water to the brewery’s new owner, All American Bottled Water Corp., for use in a future water bottling business.

The cities can pay an additional fee to use any water All American doesn’t use. And if the company doesn’t use the water in three years, the cities get all of it.

“We were able to negotiate rather than litigate,” said Steve Hall, Olympia’s city manager. “It saves time, it saves money and it meets the ultimate goal of preserving it for public use.”

The agreement could be final in less than a week. Tumwater City Council has called a special meeting to vote on it Monday. Olympia City Council will take it up on Tuesday, Lacey on Thursday.

If the deal is signed, the cities would own all the water rights and pay $1,750 per acre foot for those rights, once the state Department of Ecology transfers them from industrial to municipal use. There’s up to 7,000 acre feet of water, according to Ecology’s records, meaning the total price could be as high as $12.3 million.

But the All American attorney and city officials think there’s far less water, so the price would be far less as well. Each city would put $500,000 into the Thurston County Superior Court registry as an initial payment.

Under a separate supply agreement, the cities would provide half the water — with a cap at 1.8 million gallons per day — to All American for 99 years. In exchange, All American would pay $10 a year, plus a fair share of operations, maintenance, repair, testing and treatment costs to supply the water.

If the water All American is slated to get is less than 1.8 million gallons a day, All American can buy up to 750,000 gallons a day from Tumwater at the city’s standard commercial rate.

If All American doesn’t use the water for three consecutive years, the cities would get all of it. During those three years, the cities can use any water that All American doesn’t use and pay the company $17.50 per acre foot a year, plus inflation.

The deal can be transferred to other parties, only if those parties use it for a water or beverage bottling plant at the brewery.

Tumwater Mayor Ralph Osgood said the deal allows the public to get the water, while paving the way for All American to move forward with the promise it made two years ago when it bought the old brewery to open a water bottling operation. Osgood and other Tumwater officials have been eager to see the site redeveloped so it will start providing jobs for the community and tax money for the city.

“Yes, it was a hit to the city of Tumwater with taxes, but not as large as the negative impact of losing 400 family-wage jobs,” Osgood said. “The side issue of losing the revenue was small compared to the loss of the jobs.”

An All American water bottling venture would employ up to 200 people, company representatives have said.

Water needs

Of the three cities, Lacey’s need for water is the greatest. Last June, the city imposed a de facto moratorium on development within its urban growth area because it’s running out of water it can pump from the ground. It used 86 percent of its granted water rights to serve utility customers both in and out of the city limits in the 12-month period ending Feb. 28.

The city has requested additional water rights totaling 10,500 acre-feet from the state Department of Ecology. The agency is reviewing the requests. It will continue seeking those water rights, even with rights secured through the brewery settlement, said Greg Cuoio, Lacey city manager.

“This is going to be a helpful piece,” he said of the brewery water, “but a very minor contribution relative to the overall requirements.”

Cuoio and City Attorney Ken Ahlf have outlined points of the proposed settlement to the council members individually, the city manager said.

“They are comfortable with the terms and conditions of the agreement, and I anticipate they will respond favorably Thursday,” Cuoio said.

The legal pursuit for brewery water began Feb. 13 when the Olympia council decided to condemn the brewery land for water rights. Officials feared the water would be lost or that another private party would claim it. State law gives a water holder five years to resume use of a water right or it reverts to the state.

After initial sore feelings, Tumwater and Lacey joined Olympia’s eminent domain filing as copetitioners. And the cities signed a deal to equally share any water they win in court as well as the cost of getting it.

Talks with All American began one week after Olympia filed its petition in court and have continued for the last two months. At one point, All American’s attorney said the company would be forced to file for bankruptcy unless the cities abandon the legal proceeding. The cities refused.

A settlement is expected to shorten how long the court proceedings will be and how much it will cost. That’s because the parties have reached a price tag for the water rights and won’t have to go through trial to determine market value. It also takes away the uncertainty of what could happen if All American files for bankruptcy.

The company had filed no such action as of Friday, according to the federal court’s online database. Tom Lemly, attorney representing All American, could not be reached immediately for comment.

“It’s a fairly complicated agreement,” said Bob Sterbank, Olympia’s city attorney. “It took a fair amount of time and effort to put together, a lot of thought and consideration and creativity of all sides.”

The cities probably would tap their water reserves or look to leverage funds, possibly through selling bonds, to get the money to buy the water rights. Olympia, for example, has about $3 million in its water fund reserve, Hall said. Tumwater has more than $1.5 million in its reserve, Osgood said.

Lacey’s share of the cost will come from connection charges assessed to developers to “buy in” to the existing water system, Cuoio said. Using the money to expand the water system is an acceptable use, he said.

The city officials don’t expect to raise utility rates in the short-term to pay for buying the water rights, they said. Nor is it likely the cities would have to come up with the cash immediately, since the Department of Ecology would need time to transfer the water rights from industrial to municipal use and the court proceedings need to be completed.

The multimillion dollar cost of acquiring the water rights is competitive with how much cities pay to research new water wells, dig them and build pipelines, Osgood said.

All American’s stated plans to bottle water haven’t materialized, in part, because the president, L. Eric Whetstone, has had trouble securing financing. The man who claimed to be All American’s vice president at one time is suing All American in federal court for breach of contract.

Don Kubley, an Alaskan lobbyist, claims in court papers he was heavily involved in All American’s acquisition of the former brewery. He further charges Whetstone reneged on a verbal compensation agreement after the sale was closed that would have richly rewarded Kubley once the plant began bottling water.

Whetstone denies any compensation agreement existed between the two men. Kubley met with city officials and other business people in Washington state, but some of those sessions were without Whetstone’s knowledge, according to court papers.

The lawsuit is scheduled to go to trial in Washington state on May 22.

The company president and Kubley entered into a confidential settlement agreement on Dec. 22, 2004, according to a draft of the document obtained by The Olympian. The draft was dated Feb. 16, 2006.

All American was unable to refinance the loan on the brewery property in order to meet the payment schedule to Kubley as agreed upon, according to the document. The agreement was extended five times previously.

Whetstone agreed to pay Kubley and his counsel a minimum of $1.4 million if All American was able to refinance the brewery project or sells property through his settlement with the cities by the trial date, according to the document.

It’s unknown whether the agreement has been amended since February.

Lemly said it was his understanding that the settlement reached with the cities would avoid the trial with Kubley.