Who Pays for the Reservoir: Gilroy Sets the Financial Terms for the Amazon Data Center's Recycled Water

Susan Ameel · August 19, 2026

The Gilroy City Council voted 7-0 on August 17, 2026 to approve a reimbursement agreement with Amazon Data Services, Inc., and 7-0 again to adopt a resolution approving a draft memorandum of understanding with the South County Regional Wastewater Authority and direct staff to negotiate and execute it. Together the two actions set the terms for who designs, who builds, who holds the money, and who is exposed if Amazon walks away from a three-million-gallon recycled water reservoir at a wastewater plant it does not own — though the SCRWA side of the arrangement is not yet executed.

The item was called at 4:11 into a five-hour meeting and ran an hour, including more than ten public speakers limited to two minutes each. The entitlement itself was approved in July 2025 at the staff level with no Council vote at all — a fact that shaped much of the evening.

What the Council Approved

Two motions, taken separately.

The first approved the reimbursement agreement between the City and Amazon Data Services covering design and construction of recycled water improvements at the SCRWA facility. It was moved by Council Member Terence Fugazzi and seconded by Council Member Tom Cline, and passed 7-0.

The second adopted a resolution approving the draft MOU, authorized the City Administrator to work with SCRWA staff and its Board to execute it, and authorized non-substantive changes to the document as needed to secure SCRWA's approval. It was moved by Mayor Pro Tempore Zach Hilton and seconded by Council Member Kelly Ramirez, and passed 7-0.

The staff report was prepared and presented by Public Utilities Director Derek Cray and routed through City Administrator Matt Morley.

Before the staff report, the City Attorney addressed conflict-of-interest questions raised in advance of the meeting. His office has represented SCRWA for roughly thirty years and has worked on these agreements on both sides; he described that as a potential conflict, waivable because the parties are not in a dispute, and said it had been waived in writing by both SCRWA and Gilroy. He said Morley's role at both organizations presents no conflict. And he cited Government Code section 6508, which allows an official elected to a member agency's governing body to also act as a member of the joint powers authority's governing body when the JPA transacts with that member agency. Council Members Dion Bracco, Terence Fugazzi and Kelly Ramirez hold SCRWA Board seats; Carol Marques is an alternate.

What Gets Built at SCRWA — and What Doesn't

The reimbursement agreement covers a bounded scope: a new three-million-gallon recycled water storage reservoir at the SCRWA plant, sited adjacent to the existing three-million-gallon reservoir, plus improvements to the existing pump station and related work — piping, valving, inlet and outlet structures, ventilation, SCADA, electrical systems, motors and pumps. Cray told the Council the effect is to double storage capacity at the facility from three million to six million gallons.

Two other pieces fall outside these agreements. A 300,000-gallon reservoir on the data center site and the distribution pipeline between the plant and the site will be built by Amazon directly, under building and encroachment permits, with Public Works inspecting the pipeline work as it would any city recycled water project. Cray told the Council the pipeline design is about 60% complete and Amazon-funded, and that Amazon will use only about 10% of the pipeline's capacity, leaving roughly 90% available to future users along the route. Neither figure appears in the agreement packet; the city's FAQ page says only that Amazon will use "a portion" of the new system's capacity.

The reservoir is not bespoke Amazon infrastructure. Valley Water's 2024 South County Recycled Water Master Plan Update identified the need for additional storage and named a second three-million-gallon reservoir at the SCRWA site among its recommended capital investments. The Master Plan states that during peak summer months there is currently 0.4 million gallons per day of capacity available for future users. Its language, quoted in the staff report:

Additional storage and pumping capacity add resilience to the Recycled Water System and provide SCRWA operations staff with leverage to better serve existing and anticipated future customers.

Cray made the point directly at the dais: regardless of whether Amazon built the data center, the second reservoir and pump station had already been identified as needed. The existing reservoir has a single common inlet and outlet pipe, so it cannot be filled and drawn down at the same time, and a second reservoir also allows the first to be taken offline for repairs.

How the Money Moves

The mechanism is a dedicated, interest-bearing account held by the City.

The City establishes a Reservoir Fund used solely for payment or reimbursement of reservoir costs to the City and SCRWA. The funds are not commingled with any other funds, and any interest accrued is for Amazon's benefit.

SCRWA prepares a design budget — its estimated design-phase costs through the point where bids are received and a construction contract is ready to award, plus a 30% contingency. Within ten days of receiving notice from the City that the design budget is set, Amazon deposits that amount. Exhibit A to the agreement prices the 3 MG reservoir design at $900,000, with completion due twelve months from the effective date of SCRWA's contract with its design consultant, not counting the public bidding process. Cray repeated the $900,000 figure at the dais.

SCRWA then solicits, evaluates and negotiates bids, supervises the public bidding process, and selects the contractor. Once a bid is chosen, SCRWA prepares a construction budget on the same basis — estimated construction costs plus a 30% contingency available for change orders, unforeseen conditions, scope gaps and escalation. Amazon deposits that amount within ten days of notice. If the fund runs short, the City may request additional payments, payable within ten days of the request and subject to the cap.

SCRWA and the City submit requests as costs are incurred, each supported by invoices and documentation. The City disburses. When the project is complete, whatever is left goes back to Amazon, within fifteen business days of the agreement's expiration or termination.

"Reservoir costs" is drawn broadly. The definition runs fifteen enumerated categories and reaches contractor and supplier costs, City and SCRWA staff time including the Gilroy City Attorney and SCRWA's legal counsel, mobilization and site work, testing and commissioning, permits and governmental charges, construction and project management, legal, accounting and insurance, bonds and premiums, consultants, change orders, and supervisory fees.

Cray was explicit on the control question: Amazon has no authority to manage construction and cannot direct staff. The agreement nonetheless gives Amazon leverage short of management. Any increase to the cost cap requires Amazon's prior written consent. Amazon has the right, on reasonable prior written notice, to audit or inspect the City's books, records and accounts relating to reservoir costs and disbursements. And the City must comply, and cause SCRWA and their contractors and subcontractors to comply, with Amazon's published Supply Chain Standards to the extent applicable.

The Cost Cap and the Exit

Two provisions define Amazon's downside — and the first of them is stated two different ways in the same document.

Section 1(c) defines a "Reservoir Cost Cap" as the sum of the design budget and the construction budget as finally determined, including both 30% contingencies, with any increase requiring Amazon's prior written consent. Exhibit A, headed "Services," lists the reservoir design at $900,000 and then states flatly: "Amazon Reimbursement Cap: $900,000." Read against Section 1(c), which anticipates a construction budget that does not yet exist, the exhibit figure appears to cover only the design services it lists. The agreement does not say so, the two provisions use different names for the cap, and "Amazon Reimbursement Cap" is defined nowhere else in the document. Exhibit A is incorporated by reference. That ambiguity sits in the final-form agreement the Council approved and authorized for signature, not in a discussion draft.

The second provision is a termination right. If Amazon does not proceed with the data center, it may terminate on at least ninety days' written notice. Amazon's sole liability and the City's exclusive remedy is then payment from the Reservoir Fund covering outstanding invoiced amounts, costs already incurred or unavoidable after notice, and the anticipated cost of putting the reservoir into either a "safe and stable" condition or the condition that existed before construction began. Cray illustrated the practical test: if the project were only about 10% along, staff would most likely ask for restoration to original condition; further along, safe-and-stable becomes the realistic option.

The two documents disagree on who makes that call. The reimbursement agreement places the choice in the City's "sole and absolute discretion." The draft MOU says SCRWA "shall inform City of its election" between the same two conditions.

The exit closes. Once Amazon has received the first Certificate of Occupancy for the data center, the termination section is null and void.

The MOU carries a parallel term structure. It runs to six months after the City notifies Amazon that final acceptance of the reservoir has occurred, as determined by SCRWA. If the Amazon agreement terminates first, the MOU ends three months after the reservoir has been placed in the specified condition and Amazon has deposited enough to cover outstanding costs.

Why SCRWA Builds It

SCRWA is a joint powers authority whose member agencies are Gilroy and Morgan Hill. Its plant handles wastewater for both cities and produces recycled water distributed by Valley Water. The delivery infrastructure beyond the plant is owned by Valley Water; SCRWA operates it and performs minor maintenance under an agreement with the district.

The record gives two reasons construction sits with SCRWA rather than with Amazon's contractor. The agreement's recitals call the plant critical infrastructure whose ongoing operations should not be disrupted or taken offline for any significant period, and the authorizing resolution goes further, describing it as a critical wastewater facility requiring twenty-four-hour operations with limited interruptions. The staff report notes that SCRWA has historically managed all construction inside its fenceline because of the risk of disrupting treatment operations. Separately, the staff report states that SCRWA has no development authority over private projects in Gilroy and does not wish to engage directly with private developers.

That leaves the City in the middle: Amazon contracts with Gilroy, Gilroy contracts with SCRWA, and Gilroy administers a fund that pays for work it does not manage.

There is a scheduling consequence. Because SCRWA designs and builds the reservoir, that work sits outside Amazon's control and outside the deadlines imposed on Amazon. Cray told the Council staff wants to expedite the SCRWA work so the plant improvements stay at or ahead of Amazon's construction pace, and said there is no way out for Amazon on the obligation to provide recycled water. He also flagged pump station lead times — motor control centers and electronic components — as the long pole.

The Water Numbers, and Where the Public Record Disagrees With Itself

Water is the reason this agreement exists, and the figures in circulation do not line up.

The Water Supply Assessment prepared for the project's EIR put the industrial, irrigation and domestic water use associated with project operations at up to 23 acre-feet per year, or 7,494,550 gallons; Cray's presentation describes that figure as full build-out, covering both phases. Cray broke it down at the dais: 18 acre-feet for cooling, 3 for irrigation, and 2 for domestic use. Industrial and irrigation demand accounts for 91% of the total and is seasonal, concentrated in summer. The assessment concluded there would be sufficient groundwater to meet current and projected demand through 2045, including the data center.

Amazon's public account is different. Writing in the Gilroy Dispatch on May 29, 2026, Roger Wehner, AWS Vice President of Economic Development, stated that "the entire campus will use about 4 million gallons of water" over the course of a year, roughly equivalent to 36 households, with water used for cooling on the hottest days — about 3% of the time. Four million gallons is roughly 12 acre-feet, a little over half the WSA figure.

The household comparisons are also measuring different things. Amazon's 36-household figure describes the whole campus. The city's comparison — that post-conversion use of 2 acre-feet per year equals about seven residential homes — describes only the potable water left after the site switches to recycled water for cooling and irrigation. On a per-household basis the two are broadly consistent, at roughly 93,000 to 111,000 gallons per home per year. The gap is in the total, not the conversion.

There is a third wrinkle. The city's FAQ page states that "initially, in Phase 1, the data center is expected to use approximately 23 acre-feet of potable water per year," with a note that the answer was updated on August 12, 2026 "to bring the numbers in alignment with those studied in the Environmental Review." That casts the same 23 acre-feet as a Phase 1 figure rather than a full build-out figure.

On the destination number the sources agree. Once recycled water is online and serving cooling and irrigation demand, the site's potable draw falls to approximately 2 acre-feet per year, or 650,000 gallons.

For scale: the staff presentation puts Gilroy's potable pumping capacity at approximately 21,059 acre-feet and 2025 production at 7,913 acre-feet — about 38% of capacity, leaving a surplus of 13,146 acre-feet. Cray told the Council the data center at 23 acre-feet would use less than 1% of that surplus, and less than a tenth of a percent once it converts to recycled water. Asked what demand level would actually strain the system, he said the number would have to be drastically above 23 acre-feet, and that a large overage would engage the city's water shortage contingency plan and could require a Council declaration.

The Approval Path and the Oversight Backlash

The financing agreements arrived in the middle of a public argument about how the project was approved in the first place.

The entitlement — Architectural and Site Review Permit AS 20-23 — was approved on July 3, 2025 at the staff level by the Community Development Director, together with CEQA findings, a Statement of Overriding Consideration certifying the EIR, and a Mitigation Monitoring and Reporting Program. There was no Planning Commission hearing and no City Council vote, because the project conformed to industrial zoning on a parcel long designated for heavy industrial use. An appeal filed July 21, 2025 by MR Wolfe and Associates was withdrawn on August 18, 2025.

The Palo Alto Daily Post, summarizing a Wall Street Journal report this month, wrote that Amazon is building the $2 billion facility without public hearings and largely without local press attention until construction became visible. The Daily Post noted that the draft EIR comment period closed in September 2024, before data center resource use became a prominent local issue, and that cranes did not appear on the site until April, after building permits were finalized in March. The city's project page dates the building permit to March 19, 2026.

Cray addressed the origin of the recycled water condition directly, telling the Council that staff had proactively conditioned the permit on Amazon using recycled water and paying for it.

Public comment on Item 9.2 ran to more than ten speakers. Recurring themes: whether the City or Valley Water ratepayers have already paid for portions of the recycled water system that now serve Amazon, and whether Gilroy is owed a refund; a February email from Amazon's water manager to city staff that one speaker offered to furnish; skepticism about the City relaying Amazon's own figures at face value; a request for a bond covering long-term performance after construction; and repeated objections to the single-signature approval path. Several speakers said they supported making Amazon pay for the reservoir regardless of their views on the data center itself. Earlier in the same meeting, during general public comment, speakers raised notification practices and the effectiveness of Amazon's June open house.

The City has expanded its outreach over the past year. It published a project fact sheet in January 2026, AWS hosted an open house at Gilroy High School on June 3, 2026, and staff published a set of FAQs in August 2026. On June 15, 2026, the Council considered options for amending the architectural and site review permit process in response to a FAIR memo submitted by Council Members Marques and Ramirez. Cray committed to publishing regular pipeline construction updates on the project website and in the city newsletter.

Against that backdrop, one line in the Item 9.2 staff report stands out. Under "Public Outreach," it reads:

No public outreach was conducted for the recommended action.

Timeline

What the Data Center Is

The project occupies a 56-acre parcel at 8050 Camino Arroyo (APN 841-69-044), designated General Industrial under Gilroy's 2040 General Plan. Two data center buildings and a security building total approximately 438,500 square feet across two phases.

Phase 1 is a 218,000-square-foot single-story building plus a 2,500-square-foot security building, requiring a 49-megawatt PG&E connection, backed by twenty-five 2.5-megawatt emergency generators and one 600-kilowatt generator for essential building functions. Phase 2 is a second 218,000-square-foot building. The city's project page describes it as a building that would not include diesel generators, relying instead on emerging battery or fuel cell technology in a standalone backup power building, with lithium-ion modules at each server rack covering the startup interval — a description of the approved proposal rather than a condition. The FAQ section of the same page answers "yes" to whether the data center will operate diesel generators, noting emergency use and monthly testing regulated by the Bay Area Air Quality Management District. The Palo Alto Daily Post reported the completed facility will draw 98 megawatts.

The EIR identified two significant and unavoidable impacts: conversion of Prime Farmland and Farmland of Statewide Importance to non-agricultural use, and exceedance of applicable vehicle miles traveled thresholds.

The city projects approximately $40 million in new general fund revenue over the project's first ten years — roughly 30% property tax and 70% utility users tax, levied at 5% on electricity — reaching about $6 million a year at full build-out. The city states it granted no tax abatements, rebates or financial incentives.

Why It Matters for Site Selectors and Developers

The Gilroy structure is a usable template for a problem that recurs wherever a large water user lands next to a public treatment plant: the developer is required to fund infrastructure it cannot legally or practically build itself.

Three features are worth noting. The public agency retains construction control and the developer accepts it, because the agency will not allow a private contractor inside a critical facility. The municipality — not the developer — administers the fund and holds the contractual relationship with the operating agency, which keeps a JPA that has no development authority out of a direct negotiation with a private applicant. And the developer's exposure is bounded by a cost cap and an exit that expires at first occupancy, rather than being open-ended.

The 30% contingency on both budgets is the price of that arrangement. A developer funding public-agency construction it does not manage is buying schedule certainty and permitting cooperation, and paying a contingency premium plus full staff-time reimbursement for it. The trade runs the other way too: because the agency controls the schedule, the developer's own compliance deadlines can drift out of its hands, which is why Gilroy staff committed to keeping the SCRWA work ahead of Amazon's build pace.

The agreement also shows what a developer can hold onto when it gives up construction control. Amazon retains a written-consent veto over any increase to the cap, audit rights over the City's books, and the ability to push its own supply chain standards onto a public agency and its contractors, subject to an applicability limit and a good-faith exception process for later updates. Those are the terms worth negotiating for when the construction itself is not on the table.

It matters, too, that the improvement was already in an adopted regional capital plan. The reservoir appeared in Valley Water's 2024 Master Plan before Amazon was conditioned to fund it, which is what lets the city describe the outcome as expanded system capacity at no cost to ratepayers rather than a single-user subsidy. Applicants evaluating a site should be reading the relevant utility master plans early — the capital projects listed there are the ones most likely to be attached to a condition of approval.

Where a private applicant pays for a public asset, the capacity split is the number that determines whether the deal reads locally as investment or as subsidy. In Gilroy that argument rests on the reservoir doubling plantwide storage and, per Cray's statement at the dais, on Amazon using roughly a tenth of the pipeline it funds. The second figure is not in the agreement packet, which is a reminder that the numbers doing the most public work are not always the ones in the contract.

The Risks and Obstacles

The MOU is not executed. The Council approved a draft marked "for discussion only" and authorized negotiation and non-substantive changes. The SCRWA Board has not acted. The city's FAQ page anticipates the agreements being completed in fall 2026.

The agreement states its cap two ways. Section 1(c) defines a formula cap; Exhibit A states a flat "Amazon Reimbursement Cap: $900,000" against a services table listing only design. The ceiling stated in the exhibit does not match the formula in the body, and nothing in the agreement reconciles them.

The draft MOU contains a drafting error. Section 5 concludes: "City shall cause Amazon to deposit the amount of the Design Budget into the Reservoir Fund (the 'Construction Deposit')." The parallel provision in the reimbursement agreement correctly ties the Construction Deposit to the construction budget. This is the kind of defect that should be caught before the SCRWA Board signs.

The construction budget is undetermined. It will not exist until SCRWA receives bids, which is also when Amazon's true exposure becomes knowable.

The reservoir is not the whole obligation. The on-site 300,000-gallon reservoir and the connecting pipeline sit outside these agreements and proceed under separate permits, each with its own schedule risk.

The schedule is long and the milestones are conditional. Design and 100% construction documents must be submitted before the last Certificate of Occupancy for Phase 1; construction documents must be approved by the City and Valley Water before Phase 2 building permits issue; the improvements must be complete no later than two years after the last Phase 1 Certificate of Occupancy or the first Phase 2 Certificate of Occupancy, whichever comes first. The city anticipates the connection by 2030. Until then, Phase 1 runs on city potable water.

Council members probed for the exits. During the item, members walked through the conditions looking for scenarios in which Amazon could avoid the off-site work — including whether declining to build Phase 2 would relieve the pipeline obligation. Staff pointed to Condition 53, which gives Amazon two options for the off-site work, and to the requirement that the site connect once recycled water is available, and said a failure would put Amazon in violation of its conditions of approval.

The public water figures conflict. The 23-acre-foot WSA number and Amazon's 4-million-gallon figure differ by roughly a factor of two, and the city's FAQ describes 23 acre-feet as a Phase 1 figure while the staff presentation describes it as full build-out. Where residents are already contesting how the project was approved, unreconciled numbers are a durable source of friction.

Cost-recovery questions are unresolved. Speakers pressed on whether Valley Water or city ratepayers have already funded portions of the system now serving the site. Staff said the reservoir is fully Amazon-funded with no ratepayer contribution, but acknowledged discussion of some Valley Water cost participation in related work. Expect this to resurface.

The process is under revision. The Council is weighing changes to the architectural and site review permit process. Future data center applicants in Gilroy should not assume the administrative path that carried AS 20-23 will still exist.

What to Watch

This article is factual background and is not legal, financial, or investment advice.