the next columns to the right show that we plan to end of the current 30, 2011 -- how we plan to end with our reserves. and we plan to have them level year to year, $40 million at the start of the year and projected to end at $40 -- at $41 million of the budget when you adopt a balanced budget. as you have reviewed in the first quarter budget report, our revenues, in particular because of lower water sales, or $30 million lower than budget. what that means is that we are significantly lower, even though the expenditure side of the house shows expenditures savings, or a relatively flat budget. because revenues are that much lower, we are needing to tap into the reserves. at this point, we are still projected to end the year in the water enterprise with about $11

billion in available reserves. that is still respectable, but it is not as high as it was previously. we continue to meet our debt service coverage requirements according to our bond governance. however, we do not have as much room in the event we have any more or any lower water sales. so we continue to monitor this weekly. i know some of you look at the intranet and monitor our water deliveries as well. we view it and update accordingly. water, the results are much more pronounced. that is because our wholesale customers are doing a very good job of conserving. they get two-thirds of the water. that is why there is a very different story between the water enterprise and when you go to the waste water enterprise. in the case of the waste water enterprise, we started the year with $18.60 million of reserves.

we specifically adopted a budget with a general reserve in it to not spend it in that year, so it would actually increase reserves for future debt service purposes. we are largely on track because of slightly lower retail water usage that results in slightly lower waste water treatment on the sewer operation. it is slightly down from the $39.50 million we planned, at $36.10. in had ceci -- in hetch hetchy, we wanted to fund capital projects. we planned to end the current fiscal year with $70 million of reserves. because of some power purchasing, we are projected to end the year with about $73 million.

so what are we doing to monitor in particular the water enterprise, as well as the others? we issued budget instructions to all the departments, telling them to anticipate a flat budget, to continue to assume -- and we have rolled through the 4.6% pay cut which city employees have given back to help balance the city budget. that also benefits the waste water department, the water department, and hetch hetchy water and power. we are looking at hiring plans with all the enterprises, making sure we only fill critical positions. we have about 80 to 90 open positions right now that we are monitoring. wheatley, we are looking at water deliveries for all retail and wholesale customers. also, we continue to monitor all of our spending and income needs for all projects. in the event we continue to see

lower water, we can look at unencumbered project funds in the event we would need to pause or defer that spending to bridge any gaps. so we have tools that we can insure to keep a balanced budget, and to make sure we have sufficient fees to and in a very respectable place. overall, we continue to adhere to the key reserve ratio in the fund balance reserve policy, albeit not as high as we would like on the revenue, and the expenditure on the water enterprise -- we do need the debt service on that. with that, i am happy to answer any questions. >> i have a question. it seems our budgeting process is quick to start again, relatively soon. i am pleased to see from my seat the conservation that is happening, and also a bit concerned to see the revenues

that are down. when we begin this budget process, do we project ahead? do we base it on our previous year of what we budgeted for as far as money goes? and how'd we factor in the hope that people are going to continue to conserve, possibly more aggressively? we have these new cycle water projects coming on line, and revenues could potentially be down as rich promote conservation. >> we do that every quarter. as we walk through the first quarter results, we rolled that forward in the 10-year financial plan. assuming these lower levels continue, what would that look like them, to make sure we are on solid footing the next 10 years? we quarterly sell bonds. you have a bon mot item later on the agenda -- you have a bond item later on the agenda. investors want to know how well we provide coverage and how much revenue sufficiency we have. during the upcoming budget

discussions, as well as priority and policy-setting, we will come back and revisit those 10-year financial projections as you help to inform us what your policy goals would be. i believe that is slated for the december meeting at the request of commissioner moran and commissioner caen. vice president vietor: so you do look at the best or worst case scenario around conservation and say if we are as aggressive as possible with conservation, this is what we could be looking at for a budget perspective. >> we do. the also looked at historical deliveries to wholesale customers. we have looked back 30 years at drought sequence and non-drought sequence. and when we go through some of the interim supply allocation items a little later, you will see some historical levels of deliveries and kind of be able to compare. when we sell bonds, we have to

go through the good scenarios, the best scenarios, and the likely scenarios. we do the same thing when we look at the 10-year financial plan. the last time we revisited that, we had included a sensitivity analysis for you that said, "what if we are wrong to the good or bad on water deliveries? what if we are wrong on lower or higher buying costs? we will review that as well." vice president vietor: $30 million seem somewhat significant in lost revenue and in additional conservation, so i think it is an interesting conversation to be having. >> what would be additionally helpful and what helps us with a strong assessment is that water supply agreement the commissioner approved allows for the annual resetting and quick catch up. it was prudent to do a five-year retail rate because we have

sufficient reserves built up. it was also prudent to diversify that rate setting to do annual on the wholesale side, two- thirds of the water deliveries. there is more potential for volatility in that sector. president crowley: just to be clear, it is not just conservation. there is the cycle for the economy, and when does that turn around. it was a particularly colder it year. in some wholesale areas, they were not irrigating were they normally would. part of it is how much of that recovers and how much of that stays the same. it is not exactly clear. certainly, conservation is a big part of it. >> i think it also presents some interesting policy questions around what our investment portfolio looks like for water supply, and how we deal with the rate setting issue behind it.

i think one of the things we have seen as retract the unit costs of various projects for people, the conservation once used -- tend to be less expensive and cost effective. that does have the effect of exacerbating the financial problem in our rate-setting process, which is volumetric based. it continues to that problem. it kind of invites some thinking about how we structure our income streams so that it encourages the behavior that we want. and that is not an obvious solution. it is an interesting discussion. to be continued. >> thank you. >> the last item on the administrative report is a short update by ms. hale on community

choice aggregation. >> assistant general manager for power. on november 3, the due date for this to come and, at the bids in our second effort to find a partner for our program, we did receive four bids. those bids were tendered by shell energy north american -- north america, excuse me. consolation energy commodities group, power choice inc., ennoble america energy solutions. we are now together with the contracts and man hero reviewing the proposals, and looking forward to coming back to you on their having met minimum qualifications and who we think is best party to continue discussions with, hopefully. thank you. >> do we have approximately eight on that? -- an approximate date on that?

>> our original plan was to bring this phase to a conclusion by the end of this year. we are hoping to come back to you within that timeframe with more information on who we would go further in conversation with. vice president vietor: is there the possibility of having some more information on these, short of a recommendation by our next joint lasco/puc meeting? >> that is possible. i will work with contract and the city attorney to make sure we can share as much information as early as possible. >> the meeting in early december is to get an update on where we are. vice president vietor: i did attend, and it was quite interesting this morning, the briefing that was called by senator mark leno. it was quite informative and helpful, and it did leave me with a sense of the urgency of wanting to keep the process

moving forward, and that there is sort of this collaborative effort and this momentum that we want to take advantage of to keep the ball rolling here. >> do we have an assessment of proposition 28 impacts on the proposals? >> we do not have anything formal to share at this point. vice president vietor: perhaps at the joint meeting with could havec a moment or a quick update on what if any the impact would be. i think that would be significant. >> i think we can do that. i think the impact are probably minimal. vice president vietor: any other general manager items?

>> nothing else. vice president vietor: any public comment? i want to thank ms. labonte, ms. rydstrom, and ms. hale. we appreciate getting these regular updates. >> madame president and members of the commission, i would like to say it is always a treat to see the reports on all the progress in addressing the challenges that come up during design and construction both. the progress is gratifying. i was thinking as i looked at the photograph of the new reservoir that years ago there was a planning effort associated with that very reservoir, and staff was discouraged because it was going to be the parking lot. you look at all the other work

you are doing, and i am glad there is a whole different mental mind set on the whole program. i am also pleased to see art construction is going to be addressed by the task force. i am glad that is included in their scope of work. on the report on the water rates and water usage, what you are seeing in terms of their wholesale customer usage and water usage is being played out across the state, including throughout our service area. is there anything we can do cleverly to look at that issue, it does suggest some intriguing thinking could be done. we would be glad to work with you on that. president vietor: we would very much welcome that. i think it is going to be a trend that continues that we want to have some creative thinking on, so thank you for that. any other public comment? next item, please. >> consent calendar. all items listed here are

considered to be routine by the san francisco public utilities commission, and will be acted upon by a single vote of the commission. a, approved amendment no. 32 water enterprise, water conservation operation agreement, high efficiency clothes washer rebate initiative, increasing the amendment by $750,000 for a total agreement amount of $2.70 million with a time extension. b, accept work performed by s.j. amaroso pour water enterprise, water system improvement program reservoir seismic retrofit and improvements as

well as final reconciliation of payment items for actual work performed. president vietor: thank you. are there any questions or comments? >> i just have one. [laughter] president vietor: if there are no other items, is there a motion to approve the consent calendar? >> so moved. >> second the. president vietor: hearing no public comment, all those in favor? the consent calendar is passed. next item, please. >> item 9, a discussion of the 2010 state of the regional water system report that was prepared pursuant to section 3.10 the of the 2009 walker supply agreement -- 3.10b of the 2009 water supply agreement. >> david rigs, manager of water

supply and treatment. the state of the water system report was completed and sent to the wholesale customers. the report is three things. first, it satisfies the contractual obligation spelled out -- spelled out in the 2010 agreement. in that agreement, there is language outlining how the report should include an update on completed and planned maintenance as well as completed and planned capital. the timing of the report is synchronized with the budget. as the budget proceeds in the fall, the report is due in september. the budget proceeds in an informal way throughout the fall. that is why it is time for september. the second complement of the report is it gives us an opportunity to outline an active management plan and strategy. here is where the report houses a great deal of the permission about our assets, inventory, the condition they are in, the

complete portfolio of maintenance programs we use in the system. it integrates that with the planning process. that builds directly into the budget. as we develop the operating budget, it is all integrated together. it gives us an opportunity to efficiently address the adopted levels of service to ensure that we have the right assets in the regional water system to meet the adopted global service -- adopted level service, as well as doing it in the most cost- effective way possible, which is also an important aspect of it. the third feature of the report is that being a place where it houses this information on maintenance programs, and knowing it is going to be extensively reviewed both inside and outside the puc, we can move forward. julie is rapidly developing billions of dollars of assets we are going to inherit. we want to make sure we have the

right effective and appropriate maintenance programs to accept that so we are spending our money wisely in the post-wsip era. it also affect pas a cip moving forward so we have a strong and regular capital program rather than one that spends billions in a short time and decades at a lower funding rate. it will be much more regular moving forward, which is much easier to manage and sustained. what i have included here are three slides that very briefly give you a flavor of what kind of information you can find in the report. i am not want to go into a detail. just to give you a sense of where you can find in there. this shows our pipeline inventory. you see this in many asset management presentations. it shows not only the installation dates of the

pipeline, but the material type. this along with condition assessment date is the fundamental information we use to plan and customize our maintenance, set up our inspections, and ultimately plan to replace some of these pipelines, some of which are being addressed by the wsip program and some of which are not. now we have almost 300 large belts in the water system -- larvge valves in the water system. these are the installation dates. some date back to the spring valley water company. many date to the original hetchy construction in the 30's. they are part of our whole shutdown plan. some of them will be replaced in wsip. some do not need to be replaced for a while. others will be replaced in following years and will show up in the 10-year cip.

this is a graphic it may be a little bit difficult to see. it does illustrate one of our more important preventative maintenance programs. this deals with valve exercising, the opening and closing of valves. it is a cost effective maintenance program that greatly expands the life of valves in the water system. no one wants to pay for one price by having it prematurely fail. this graph shows are cumulative goal for achieving this maintenance of activity. we are under that map, which is shown in blue. these are all in quarters. we are not able to devote as much activity as we would like because we are busy with julie's construction program right now. when mr. to get a little bit easier, we will rapidly catch up -- when this starts to get a little bit easier, we will rapidly catch up. if you have any questions, i will answer any of them that i

can. >> you might want to mention the changed look at how we look at dams and dam safety. >> i alluded earlier to the post-wsip iraq and how these are being documented in a public way and being peer review, which i am a fan of. in the damn program and the pipe inspection programs -- onin the dam program and the pipe inspection program, which we are reviewing with osha, things are getting better, and monitoring is a big part of that. >> i really like the report. what i like most about it is it exposes the thought process behind the capital program. it really helps dispel the notion the capital program is just a wish list somebody came up with on a sunday afternoon,

and lays out what the logic and thinking is behind that. i think that is extraordinarily helpful. i think you have probably done that at some jeopardy to your own reputation in the organization because pretty soon we will ask that of every part of the organization and you will soon be the least popular guy in town. i did have a couple of specific comments on the report. on page 33, you talk about the level of service and structure. my first reaction to that is that the levels of service are something the commission has adopted. i think we need to be careful to honor what it is the commission has conducted an not extemporaneously is beyond that. -- and not extemporaneize beyond that. the other is levels of service.

we had that discussion within the wastewater system, and what we adopted -- the things we are talking about, the adoptive level of service, we recognize that in order to achieve those levels of service there are going to have to be implementing actions that follow to make them real. there were significant choices in there, but there were different and specifying what the level of service was we were trying to attain. my sense as you described it was that the second level of service was really not a level of service, per se, but a set of implementing strategies for getting there. >> that is exactly how i would phrase it, exactly. vice president moran: and i think we just need to be -- that is an issue we will keep revisiting. and i think it is important to draw the extension -- the distinction between the goal and implement a strategy as part of this recommendation for a capital program. -- between the goal and

implemented strategy as part of this recommendation for a capital program. let me review my notes and see what page this is. on page 35, you talk about a water supply level of service, and you talk about the conservation -- i am sorry. the shortage practice that we have, and the standard reset for that of going into various levels of conservation as a drought progresses. that increased the firm yield of the system. i would take issue with that. the firm yield is a function of hydrology and facilities and policy. it is not -- you do not change that just by saying you are going to conserve when you run out. we need some other term for that. for the fact is that we plan to supply water above the firm

yield of the system on the assumption that in a drought you can cut back. again, we need to be careful about the language we use and come up with a term that better expresses what that really is. >> steve ritchie, assistant general manager for water. agree completely. one thing we agreed about was making sure we used consistent service language. we were not the coming extemporaneous. the source we used their -- that is an inaccurate statement. and we will make sure it changes. vice president moran: thank you. there was one that puzzled me. you talk about wsip programs not included because all wsip appropriations are complete. >> yes. [laughter] we have actually gone through this commission and to the board of supervisors and we have appropriated all the funds we

believe we need for wsip. there are some items still on reserve. as you approve projects over $100 million, those are reserved for the budget committee. we have appropriated -- last time, we added $1.70 billion and finalize the appropriation of the budget as we know it. vice president moran: my recollection -- and this may be an old recollection -- my recollection of cip was that it would reflect appropriations in one every year they were until there were spent, and that appropriating them did not take them out of the picture. >> right, wrong, or otherwise, it does. vice president moran: so this doesn't show the full coverage? >> it does not should be spending. i believe it shows the appropriation status. although we will be spending for

the next apple you are years, it is done -- although we will be spending for the next four years, it is done per the controller's report. president vietor: any other questions? any public comment on this item? >> we haveyour cards. president vietor: next item, please. >> item 10, presentation and discussion on draft wholesale customer interim supply allocations through 2018. pursuant to section four. 02 of the 2009 water supply agreement -- pursuant to section 4.02 of the 2009 water

supply agreement. >> i am going to talk about the interim supply allocation primarily and have todd talk about the environmental surcharge. they go hand in hand and we will discuss them together. the interim supply limitation is the commission decision in october 2008 to limit total system deliveries from the existing watershed's to an average of 265 million gallons a day through 2018. the "they're on the third bullet was what the commission stated at -- the quote there on the third bullet was what the commission stated at the time, to minimize additional diversity -- additional diversions from the tuolumne river. it was imposed by the puc. it was a unilateral decision