Why

In 1995, the State Water Pollution Control Resources Board (SWPCRB) found that Cal-Am did not have the legal right to about 10,730 acre-feet annually of its diversions from the Carmel River, and further that the diversions were having a deleterious effect on river resources. (SWRCB Order 95-10)
The Board issued a Cease-and-Desist order prohibiting Cal-Am from illegally diverting water. This amounts to a 70% cutback on pumping from the river.
In addition to cutbacks on the Carmel River, Cal-Am's second source of supply, the Seaside Basin, was  reviewed in a separate proceeding. A series of reductions was ordered, so that by 2021 Cal-Am's Seaside Basin rights will be less than half of what it had in 2006.

Because of the over-pumping of the rivers, saltwater intrusion is affecting the quality of the aquifers;  some wells have water quality problems relating to high nitrate concentrations.

Demand for water on the peninsula is estimated  by Cal-Am to be approximately 15,000 acre-feet per year, leaving it with a shortfall of roughly 9,000 acre-feet per year after the cutbacks. (MPWMD has a supply-vs-demand chart that illustrates the drop-off in supply after 2016. ) In response, Cal-Am has proposed a desalinization plant, supplemented by water from two additional projects: the Groundwater Replenishment Project (GWR) and the Aquifer Storage and Recovery Project (ASR). Several other desalinization proposals have also been put forward by other groups.

Why Desalinization?

Aren't there other ways to make up the shortfall, such as conservation or water recycling? In it's application for the WSP, Cal-Am maintains the following reasons why desalinization is the answer:

• Prior to the 1995 order, demand exceeded 18,000 acre-feet annually. Cal-Am was ordered to implement conservation measures, and tiered rates for water usage were introduced.  Since then, water use has fallen about 25%. Cal-Am believes water usage is already about as low as it can go, and further significant reductions are not realistic. 
• Cal-Am instituted a comprehensive study on "non-revenue water," that is, water lost via water main breaks and leaks. While some leakage is considered unavoidable, its Infrastructure Leakage Index (ILI) of 1.08 is already at "world-class" standard and any further reductions would not make a significant difference. 
• Recycled water (or "grey water") is part of the plan as Cal-Am is working with the MPWMD on the Groundwater Replenishment project. At this time, the water produced by GWR is not sufficient to meet the shortfall.