we need to decide the individual wholesale customer of that allocation by december 31, 2010, which is why we are here today to give you a flavor of that and get guidance from the commission so we can bring it back to the december 14 commission meeting. coupled with the interim supply limitation is the environmental enhancement surcharge, which is really a method to help enforce the interim supply limitation. the goal is for us collectively to stay below 265 million gallons per day. in the rate setting process next year, you will be asked to establish an environmental enhancement surcharge. that will be levied if the combined purchases exceed that interim supply limitation of 265 mgd. the limitation would go to agencies that exceed their supply limitation. it goes out to all customers, so it makes the allocation a very

important thing for customers, as you will see by the comments we of received already and the number of customers who are here today to comment on the matter. in addition to the environmental enhancement surcharge, peir included litigation matters. depending on which matters are implemented, the cost could total to about $7 million worth of mitigation. some of that is what your purchase. some of that is in fundamental -- some of that is water purchase. some of that -- the wholesale customer collective allocation includes the demands of san jose and santa clara. that is one of the reasons why this is an interesting and difficult problem to deal with. that number is the same as the

individual supply guarantees added up for the customers plus demand. with the interim supply allocation, we have to shoehorn in san jose and santa clara along with every body else. the cannot say we will just use the individual supply guarantees. that does not mathematical work. you still have to deal with san jose and santa clara. to try to do this, we have been speaking with the wholesale customers and had two draft versions we have developed, generating lots of feedback from the customers. this is something they all have an individual opinion on. this is not a collective bosco opinion. individual agencies still strongly about that. we use projections through 2018. the total of those is less than one under 84. that mathematically would accommodate the -- the total of those is less than 184.

that mathematically would accommodate the allocation. in turn supply allocations are based on customer purchase projections and supply guarantees. in effect, all agencies were assigned the individuals apply guaranteed or their 2018 purchase projection plus 10%, what ever is less. the would receive as projected purchase request because they are a unique category themselves, having a contract that does not have a limit on the amount of water that can purchase. san jose and santa clara each received half the difference between the some of the other agencies and the 184. now we are in the process of considering modifications to either that, or modifications to the first version. one big issue that popped up in this was making sure we are consistent with the water supply agreement. the second draft approach is consistent with section 3.02d of the water supply agreement,

which says the wholesale customer responsibility to limit purchases from san francisco to remain within the supply guarantee. it does not say interim supply allocations have to be explicitly related to the individual supply guarantees, but a lot of our customers identified this as an important issue for them. that is something we need to take into consideration. one of the things that is also in the agreement that allows for some of these issues that are presented is the possibility of transfers of interim supply allocations. within that, wholesale customers can be transferrees. it does not allow san francisco to participate -- just customers. it has to be for the remainder of a given year. our role is to reasonably determine the ability to move water and deliver water to the transferee, and transfers would stay in effect until december

2014 or until lotus that the transfer is no longer in effect. that is not just about transferring water. we have the ability to deliver however much water our customers' demand on a given day. it is about how to calculate the environmental enhancement surcharge. that is something people get confused on. the allocation does not limit the amount of water somebody can take. it just puts them in a position of potentially having to pay an environmental enhancement surcharge if those circumstances arrived. when we get to the second allocation, i wanted to point out what kind of emerges from that. in effect, this list here -- from the second draft of supply allocations -- they are those that have isas greater than the purchase projections by virtue of the fact that they have a higher individual supply guarantee. in effect, these customers, including palo alto and menlo

park -- if we make a decision that results in an encouraging of a transfer market, these are the most likely parties to have something to transfer to someone else. on the other end, we have both agencies -- we have those agencies to have a draft amounts lower than the projections. these are the sixth lowest. palo alto in daly city are set up as parties who might potentially want to transfer allocation to them. these are the parties who might be most interested in a transfer market if the decision by the commission is one which encourages a transfer market as a way to make this work out. the transfer is not real water. it is a brisk judgment of how much risk an agency thinks -- it is a risk judgment of how much risk an agency thinks it might exceed its allocation. the last of my slides is just to

know that as we have talked about previously in the budget for this year, average annual deliveries are down to the watersheds. there were two under 25 -- they were 225 mgd. that is substantially less than 265. that is one of the factors we all need to consider in this. we are still a way from that. that does not say the economy rebound demands will not grow rapidly, but it is a consideration. that is my discussion of the interim supply allocation. we can entertain questions or discussion about that now, or move to todd's part of the presentation and discuss this as a whole later on at your pleasure. president vietor: a think we should continue on and then take questions at the end, unless you have something pressing, burning. i think we should continue.

thank you. >> good afternoon again. todd rystrom again, assistant general manager and cfo. the environmental surcharge will be before your next month as the rate setting process. but the first part has to be adopted by the end of this year, so we wanted to come before you and put into context what the various alternatives and considerations might be when we do have to altman did bring before you consideration. the environmental surcharge slide to have before you are not a proposal. the largest factors for consideration, discussions we will have with wholesale customers as well as environmental agencies and this commission. the contract water supply agreement laid out the key

provisions of the surcharge. again, they were if purchases exceeded that 265. as mr. ritchie showed, we are about 15% under that right now. in addition to that 265, it was broken down to 81 mgd on the retail side, and then also customers have an allocation of 184 mgd. it had to be levied on agencies over interim supply allocations. that was the key new term in terms of supply allocations. it had to be based on isa by both wholesale customers and retail to help ensure the demand was kept under the 265. that is the key goal. the surcharge also in the contract or supply agreement required an equivalent rate to be set for retail and wholesale. so if somebody is one mgd over,

that is the same rate no matter if you are retail or a wholesale entity being one mgd over. it was also said to require beginning in 2011-2012 and go through 2018. it had to be adopted as part of the regular budget rate process of there was plenty of time for our wholesale customers as well as us to deliberate and to provide notice to customers as necessary. based on actual usage, the requirement should be simple and easy to calculate and administer as part of the retail rate, and pass through the retail rates. further, it had to be equal monthly installments collected in the immediately following year. even though you factored and considered this as part of the march hearings or the march rate adoption, we would not actually administer it until we went all the way through 2011-2012.

we have actual water deliveries at the end of 2011-2012, which typically take until august/september. we would implement it if necessary almost a year later. let us just pause for a moment and look where we are, where we have been, and where we are projected. this chart is one that we use a lot. it includes -- the vertical access shows the millions of gallons per day of delivery, and the bars on their -- the red bars in particular are shown to be at the 265 mgd amount and the 184 mgds. those are the key threshold for the interim supply allocation and whether the surcharge gets triggered. the surcharge could trigger if we are over the top red line. if we turn the clock back and

look at where our water deliveries and uses were in 2003-2004, you will see are also customers got right under 184 mgd from the hetch hetchy system and total water deliveries were just under the to under 65 --265 mgd trigger. as part of conservation, even though the economy was recovering and doing fine in the 2005-2007 time period, our water deliveries continued to trail down. as i discussed earlier, during fiscal year 2009-2010, uc we were down even further. this chart takes where we were and where we ended the year, and then takes the projections mr. ritchie mentioned we received through discussions with the wholesale customers, and then put these on this chart. if those projections were to

come true and play out, then we would, even with that, not exceed the 265 mdg threshold to trigger the surcharge. again, like we do sensitivity analysis on the 10-year financial plan, what if our projection is off 1%? what does that mean if we trigger and go over that 265? mr. ritchie has gone through who are likely candidates to be impacted. they were candidates that under the isa interim supply allocation draft two would likely have usage or projected demand that exceeded their interim supply allocation as currently drafted under the draft version number to that has been discussed with wholesale customers. for example, the burgundy lines

here show how much in excess the usage would be. santa clara, san jose, purisma hills, east palo alto, daly city, and cal water, based on projections receive from them, could be using more than their interim supply allocations would be if version 2 was adopted as currently shown. this is important because it gives a relative scale of what is the potential magnitude of being over. for example, we had 265 mgd. right now, everybody is projected to be under. what if everybody is slightly over? these entities, based on their projection -- the maximum would

be projected to be over is about 1.5 mgd, so relatively small numbers as a percent of the whole 265. so we want to make sure that we understand the potential scale of being over in any sensitivity analysis. another way we look at this -- everybody else who is not here, based upon what the projections are, are not projected to exceed their interim supply allocation. some of our customers, about 14 or 15 of our wholesale customers, get 100% of their water from the sfpuc. others get significantly less and have other ground water or local sources. looking at that same potential overage of the interim supply allocations, that will feel very different to santa clara than it would appeal tfeel to purismo hr east palo alto, because they

would be getting the lion's share of their water from the sfpuc. we all, as we have water diversification, if we have that we look at typically where we can source that water. in the case of a couple of the customers, they do not have perhaps as many alternatives for local ground water or other local water supplies to help them stay under or within their supply allocation. so that is kind of a lot to digest all at once. it does mean that there is potentially six that if projections are even exceeded that these might be the ones that would be impacted by any potential surcharge. which you are not adopting today, but you will be considering as part of next year if rates. -- next year's rate. so what are all report -- so

what are our alternatives to ensure we do not have to pay the surcharge? it is now 2010. to the degree communities can consider ground water sources or recycle water plants or other conservation mechanisms, there is a good bit of time for the consideration. some communities have done planning an already assume that in some of their projections as well. it is not always easy to make a decision in a year or two or three to bring a major alternative on-line. nevertheless, you have seen a lot of alternatives each time we come before you to look at our recycled water projects or to look at the budget and whether or not to fund conservation projects. will we have done is we have re- summarized those costs to achieve 1 million gallons of savings, or an additional

million gallons of water supply in this chart, because these are, in the case of the retail customers -- they are potential ways to ensure that we do not exceed our supply allocation and do not have a triggering of the surcharge. if i could just walk you through one of the lines, the one i want to start with is the yellow highlighted line. to put this into context, the cost of business for water once we do all of the wonderful water system improvement programs and sell the debt, by 2018, to buy water from us will be approximately $1.90 million per mgd. so that is the first column of numbers. what that means in acre-feet is 1656. what that means when you look at the 10 year financial plan, look at projected rates going up, that is at $3.80 that we have

talked to you about as a projected rate trajectory. that is the same $3.80 we talked to hall so customers about. given the current good work of the wsip program and projected that sales and water deliveries, that is what we would need to do, and ultimately collect about half a penny per gallon from a customer in order just to pay for costs currently envisioned in the budget and currently projected through wsip completion. that is the important starting point in the status quo. as president vietor mentioned, and commissioner moran as well, conservation is typically one of the cheapest ways to make sure we can free of water for other uses, or not use it to begin with. we have gone through with the water enterprise team and look at our various conservation efforts, the high efficiency

toilet replacement program and various other irrigation programs, and look at what the projected cost of that might be. what that means is we could effectively save 1 mgd by investing about $8,012. that is less than half the cost of what it would be to purchase it from the system itself. that is calculated in acre-feet and gallons. it is cheapest to do conservation, typically, based on the projects we are working on and the ones we have reviewed with you in the past as part of the budget. you have also come through your deliberations as part of the wsip budget looked a ground water projects for san francisco. our portfolio ground water projects -- the average cost of water there would be $3.10 million an mgd, or roughly $6.36

ccf. that column is important for me because that is how all the bills actually go out of the system and get billed to retail customers. other ones, just for reference purposes -- the ground water regional conjunctive use, which would only want to use during certain years of drought or low supply, comes in at about $6.30 million mgd, and the recycle water projects -- they are typically more expensive as a cost for amount of water. they come in at $7.60 million. while overall we are not projected to exceed that 265, part of the reason is because the wholesale customers and san francisco have specifically included conservation and other alternates, supply ideas such as

recycled water and ground water, into their capital plans, just like we have done our capital plan. but these are really important metrics, because in order to, i think, provide adequate financial incentive not to exceed, you cannot have to know what the other alternatives might be for a system operator to consider if they do not want to pay a surcharge kind of a fine. one step more is complex. if we have to define the surcharge by amount equal for everybody, 1 m mgd surcharge equals $1 million, as a pure hypothetical, that feels very different if we are selling that water to someone who uses 10 mgd versus some entity that uses 25 mgd.

holly will administer and bill that the news that a year later will filellel a bit different. i have used an illustration-only hypothetical. if i can walk you through one of those. potentially likely affected will be the same sex mr. ritchie mentioned, as well as myself -- the same six mr. ritchie mentioned, as well as myself. if we were to take those same amounts of metrics for cost per opemgd as we discussed in the previous page, and compare it to come up for example santa clara, santa clara would be projected to go over by 1.83. if that 1.83 were taken times the cost to conserve one mgd of water, that $8,012 on the

previous page, that would result in revenue generated of about $670,000. the rest of the math works the exact same way. it just walked down and takes that projected offering -- it just walks down the line and takes the projected offering down the previous page. it does show the potentially large number that can result. again, not proposing a rate today or an idea, but it is a pretty significant issue. so we have time to think about this between now and march, when we have to come back to this commission for final adoption. the surcharge ultimately has to be collected the year afterward, after we no actual, and the billing session is set up in ccf. whatever rate we adopt as a surcharge, mathematically will

turn that into an adder on the bills we do. the key items for discussion today in consideration on the usage is beinthe peir mitigation mentioned earlier. if we do go over the 265, the first thing triggered is a potential additional $7 million of environmental mitigation costs. that was envisioned as part of the peir. the other portion is the environmental enhancement surcharge, which also gets triggered if we go over that 265. that will be something that we will have to consider and adopt as part of the march rate setting process. if i can just recap the timeline for you on the surcharge, the leader of the two, you'll be hearing more about what to

deliveries and what water deliveries look like. we will pass the 265 or not. in march, we come back before you to look at the wholesale rates, look at the surcharge special fund resolutions. the contract requires us to have the board approved a special fund that this money gets dedicated to. that only goes into affect if the board does adopt that line. lastly, the environmental enhancement surcharge would be effective through 2018. in april, the board of supervisors will take that resolution on the special fund proposal from the commission and decide whether to adopt. july and thereafter, it would potentially be enforced. commission input for today as well as from our environmental stakeholders and wholesale

customers would be if there are ideas or preferences for design, what are the levels of the magnitude, the pricing signals you would want to send? you know what a few of the alternatives might cost, at least for san francisco customers. how we as a policy matter place the excess burden of excess usage over the 265 related to the peir mitigation triggers, and the supply mitigation -- that is clearly outlined in the project. that lies with whatever the entity is the goes over their allocation. what you adopt as far as that allocation will be pretty important to wholesale customers in december, before you take final action on what the surcharge might actually be

in march. that is it for now, unless you have questions. president vietor: i think that we will hear from the public first, and then the commissioners can formulate some thoughts as we hear from either the wholesale customers or some other members of the public. >> madame president, we have 10 speaker cards. mr. neesar, councilman abreeka, mr. sweetland, mr. rosenbloom, mr. kuratori, mr. amrai, mr. druckmeir, ms. fong, ms. wizlick, ms. doubty, and mr. gordon. and i believe mr. jensen would

like to wrap up. president vietor: if you can keep your comments to 2 minutes, that would be great. >> i would like to think the commission for this opportunity. our comments supplement a letter which submitted on november 5. i would like to start by thanking mr. ritchie. he has been a friendly face on the process. president vietor: you have to move over a little bit so you can speak into the microphone. >> is that better? we appreciate that the sfpuc has been engaging boscaa in this process. we serve users in fremont. over 25% of the demand is met by the hetch hetchy system. we