A 100-year contract between a special district and a water bottling company that calls for the district to provide up to 1,600 acre-feet of water per year is not a project requiring environmental review, the Third District Court of Appeal has ruled.

The court rejected the argument of bottling

The district entered into the contract during October 2003. The district is located in southern Siskiyou County, southeast of Mt. Shasta. It has a total supply of about 14,500 acre-feet of water from three springs. The district serves the unincorporated town of McCloud, whose local economy has suffered with the decline of the timber industry. The district considered starting its own water bottling operation before deciding to find an experienced partner; hence, the deal with Nestle.

The agreement is for a 50-year term with a guaranteed right of renewal for another 50 years. Under the contract's terms, Nestle would determine the feasibility of the project during an initial five-year contingency period. Also during this contingency period, the district would design a separate water collection and delivery system, the two sides would jointly develop a water supply contingency plan and a road use plan for trucks, the district would install groundwater wells on Nestle's site, all discretionary permits would be secured, and an environmental review would be completed. Nestle would bear all of the costs.

After the contingency period closes, Nestle would have a contractual right to water deliveries. Nestle would pay about $400,000 a year for the water and fund a community enhancement program.

Project opponents argued that Nestle could drain the local water supply, that truck traffic would present a problem, and that an historic asset would be lost when Nestle built its plant on the site of the closed California Cedar Products lumber mill. Opponents demanded the district prepare an EIR. When the district declined, a group called Concerned McCloud Citizens sued. Siskiyou County Superior Court Judge Roger Kosel ruled for the opponents, finding that the contract constituted an initial and integral stage of a project within the meaning of CEQA and committed the district to a definite course of action.

The community services district and Nestle appealed, and a unanimous three-judge panel of the Third District overturned the lower court.

The appellate court noted that no one disputes the ultimate project--purchase, sale and delivery of water, construction of various facilities, drilling new wells, etc.--is subject to CEQA compliance. The question is whether approval of the contract amounted to approval of the project. The court said no.

"The agreement at issue, when read as a whole ... does not commit the district to a definite course of action in regard to a project, nor does it amount to a commitment to issue or the issuance of a contract or other entitlement for use of a project," Justice Tani Cantil-Sakauye wrote for the court, citing CEQA Guidelines [section] 15378, subdivisions (a) and (b). "The agreement, while admittedly a binding contract, is conditional and does not grant Nestle a vested right of use of the project. The agreement is predicated on a series of ifs and commits the district to sell water to Nestle under the described terms only if the described terms are successfully completed."

The biggest if, according to the court, is the discretionary permits, which require assessment of all aspects of the project.

"Contrary to the trial court's interpretation of this agreement as placing the district on the verge of divesting itself of any modicum of control over the compliance process, the terms of the agreement demonstrate the district retains the right to participate in and approve or disapprove of or modify major aspects of the prospective project," Justice Cantil-Sakauye wrote. "Clearly the district is favorably disposed to the ultimate success of this project, but the agreement does not preclude it from considering a full range of options depending on subsequent CEQA review."

The court determined the contract is a placeholder that sets out financial terms while the project itself is reviewed.

The court said the McCloud contract is similar to the situation in Stand Tall on Principles v. Shasta Union High Sch. Dist., (1991) 235 Cal.App.3d 772. In that case, a school district board of trustees passed two resolutions selecting a site for a new school and authorizing the administration to make a formal offer for the property. The offer was contingent upon completion of an EIR and final state approval. Local residents who opposed a high school on the chosen site challenged the timing of the EIR. But the court held that the resolutions were not subject to CEQA review because they did "not commit the district to a definite course of action" and because they were expressly contingent on CEQA compliance. The court ruled that the timing of the school district's CEQA compliance did not preclude alternative sites (see CP & DR Court Cases, December 1991).

The Nestle project still has many uncertainties, the court noted. The agreement does not specify which springs will provide the water, nor does it identify the site of the bottling plant. The need for and location of pipelines and truck routes is unknown, and no plans have been drafted for water supply contingency or road use. "At the current planning stage of this proposed project, preparation of an EIR would be premature. Any analysis of potential environmental impacts would be wholly speculative and essentially meaningless," the court ruled.

A draft environmental impact report--which was not part of this litigation--was released in 2006 and drew extensive public comment. The district is likely to consider certifying a final EIR later this year.

* The Case:

Concerned McCloud Citizens v. McCloud Community Services District, No. C050811, 2007 DJDAR 1560. Filed January 2, 2007. Certified for publication January, 31, 2007.

* The Lawyers:

For Concerned Citizens: Donald Mooney, (530) 758-2377.

For the district: David McMurchie, (916) 443-1030.

For Nestle: Lisabeth Rothman, Hatch & Parent, (310) 440-9996.