BOARD AGENDA MEMORANDUM
Government Code § 84308 Applies: Yes ☐ No ☒
(If “YES” Complete Attachment A - Gov. Code § 84308)
SUBJECT: Title
Consider the May 19, 2025, Recycled Water Committee Recommendation to Authorize the Chief Executive Officer to Negotiate and Execute the Option Agreement for First Amendment to Ground Lease and Property Use Agreement Among Valley Water, the City of San Jose, and the City of Santa Clara and the Draft Amended Agreements Between Valley Water and the City of San Jose to Develop a Direct Potable Reuse Demonstration Facility.
End
RECOMMENDATION: Recommendation
Consider recommendations from the May 19, 2025, Recycled Water Committee meeting to:
A. Authorize the Chief Executive Officer to negotiate and execute the Option Agreement and amend agreements necessary for the DPR Demonstration Facility;
B. Authorize the Chief Executive Officer to Negotiate and Execute the Option Agreement for First Amendment to Ground Lease and Property Use Agreement among Valley Water, the City of San Jose, and the City of Santa Clara in substantially the same form as the attached draft;
C. Authorize the Chief Executive Officer to Negotiate and Execute First Amendment to Ground Lease and Property Use Agreement for the Advanced Water Treatment Facility between the City of San Jose, City of Santa Clara, and Valley Water in substantially the same form as the attached draft and upon satisfaction of the conditions to exercise the option;
D. Authorize the Chief Executive Officer to Negotiate and Execute First Amendment to Recycled Water Facilities and Programs Integration Agreement between Valley Water and the City of San Jose in substantially the same form as the attached draft; and
E. Authorize the Chief Executive Officer to Negotiate and Execute Amended and Restated Agreement for Operation and Maintenance of the Silicon Valley Advanced Water Purification Center between Valley Water and the City of San Jose in substantially the same form as the attached draft.
Body
SUMMARY:
Background
The City of San Jose (City) and Santa Clara Valley Water District (Valley Water) have historically collaborated to expand recycled water and augment the local water supply in the county. The City and Valley Water partnered on the construction of the Silicon Valley Advanced Water Purification Center (SVAWPC), 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 Jose/Santa Clara Water Pollution Control Plant, otherwise known as the Regional Wastewater Facility (RWF) to enhance recycled water quality distributed by the South Bay Water Recycling Program (SBWR). The City and City of Santa Clara are co-owners of the land surrounding the RWF, and the City serves as the administering agency for the RWF.
On March 2, 2010, the City 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 SVAWPC on RWF premises and the Integration Agreement established a cost-sharing methodology between the parties to offset the cost of operating the SVAWPC. On October 23, 2012, the City and Valley Water executed an Operation and Maintenance Agreement for the Advanced Water Treatment Facility (O&M Agreement).
In 2023, the City and Valley Water executed a letter of intent to collaborate on the expansion of recycled and purified water in the county. Valley Water’s Board of Directors and the San Jose City Council also confirmed, in 2023, their support for:
• A joint water reuse program to meet local water supply needs.
• The development of a feasibility study, demonstration facility, and institutional agreements, including lease and wastewater availability agreements.
• A coordinated public outreach program.
In 2024, the City and Valley Water entered into a Master Funding Agreement to provide for funding of City 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.
Before Valley Water can build a full-scale DPR facility, Valley Water plans to construct and operate a demonstration facility to perform needed studies for permitting and 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 would include a visitor learning center for tours, education, outreach, and to garner public support.
Option Agreement
The proposed Option Agreement for First Amendment to the Ground Lease and Property Use Agreement (Option Agreement) would grant Valley Water an option to execute the First Amendment to the Ground Lease and Property Use Agreement for the construction of a DPR demonstration facility following satisfaction of certain conditions including primarily the completion of environmental review and approval of CEQA determinations and execution of the amendments to the Integration Agreement and the O&M Agreement. The Option Agreement also provides a meet and confer process to amend the Option Agreement, lease amendment, Integration Agreement amendment, and O&M Agreement amendment as a result of the planning process or environmental review for the project. The Option Agreement consideration will be a one-time $10 payment to be paid by Valley Water. The Option Agreement will be executed by the councils and Board in June.
Lease Amendment
The proposed Ground Lease amendment will update the footprint of Valley Water’s SVAWPC lease to account for the construction and operation of the DPR demonstration facility. Concurrently, a future Microsoft development may require expansion of the North Access, which would require a portion of the land currently included in Valley Water’s lease area. Valley Water and Microsoft are negotiating the terms for relocation of the SVAWPC Visitor Center and related utilities as consideration for Valley Water agreeing to amend the footprint. The proposed Ground Lease amendment will allow for modification of the footprint to either keep the Visitor Center in its current location, or an alternative footprint to allow for expansion of the North Access Road and relocation. The additional acreage is about 2 acres. The proposed amendment updates the termination clause. The annual rent will continue at the same amount of $10, and the agreement would be extended from 2050 to 2065.
Operations and Maintenance Agreement Amendment
The proposed amended and restated O&M Agreement would update the operational obligations of the City 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 our 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 DPR Demonstration Facility onto all existing operation and maintenance procedures for the SVAWPC, to ensure any wastewater discharge, sampling and monitoring, and documenting and reporting obligations apply to both facilities. The term would be extended from 2050 to 2065.
Integration Agreement Amendment
The proposed amendment removes the automatic termination clause and allows for curing any breaches in the agreement and changes the financial terms. At the time the Integration Agreement was first executed, a complex formula for revenue sharing was included to at least partially offset Valley Water’s cost to operate and maintain the SVAWPC. With the projected increase in future revenues from the sale of recycled water due to increase in wholesale water rates, a change in the methodology was negotiated to simplify the financial arrangement. The proposed Integration Agreement amendment would reset the cost-sharing methodology between the City and Valley Water 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 recycled water system. The original term would be extended from 2050 to 2065.
ENVIRONMENTAL JUSTICE AND EQUITY IMPACT:
There are no environmental justice and equity impacts associated with this item. This action is unlikely to or will not result in adverse impacts and is not associated with an equity opportunity.
FINANCIAL IMPACT:
The Option Agreement one-time $10 payment is budgeted in the Recycled and Purified Water Program Project, Project No. 91101001, which is included in the FY 2024-25 Adopted Budget. There are adequate funds in the Project’s FY 2024-25 Adopted Budget to encumber the planned expenditures for the agreement.
CEQA:
The recommended action does not constitute a project under CEQA because it does not have a potential for resulting in direct or reasonably foreseeable indirect physical change in the environment.
ATTACHMENTS:
Attachment 1: PowerPoint
Attachment 2: Agreement
UNCLASSIFIED MANAGER: Manager
Kirsten Struve, 408-630-3138