sustainability, greening, as well as work force to the limits, so the attachment in your packet talks about those. -- as well as work force improvements. this is in preparation for your consideration, keeping in mind the prioritized items. there was the system reliability, regulatory compliance, health and safety, a community benefit, jobs, affordability of rates, revenue generation, and also stewardship policies, so we will continue to

look at those and prepare the presentation, and then any other items you would like to add to that. as i mentioned, we are always working on about four fiscal years. there are the quarterly financial projections for the budget, and this is really a continuation of " what you heard about the first quarter financials. we are doing very well. a lot of our sales are lower than we projected originally. what that means in terms of dollars is that there is $10 million less annually, and because we adopted a five-year retail rate, we are assuming we will be $10 million short over

the next few years. on the wholesale side, we know our wholesale customers are always timely in their payments, so we will catch up to what we need to pay the required revenues but what this means is that some years, if we assume sales are here, our collections are deferred and that is why there is a balancing account. right now, our sales are down significantly because of confirmation -- conservation.

the november data, as well shows this -- as well, shows this. on the retail, folks conserve another half of 1%. another thing to look at is but the budget proposal and the way to maintain the five-year adopted a rate plan, in this is so we would not have to go back and ask for another. we do it balancing account audit -- a balancing account audit. we are short in water sales. we are $30 million short this year, and that is only if

wholesale customers, retail customers, are even doing better at conservation, and we're only at about 51 gallons per person per day, and that is one of the lowest in california, so we do not go to zero. people need to shout or -- to shower, but people are doing a really good job of conserving korea -- of conservative. what this means is that if things do get worse, we would likely have to have budget cuts. right now, the general manager has asked us to come forward with a flat budget, and this is to live within the existing rates that we have.

the context of this, because it is kind of hard to tell, the blue line at the bottom there is the water deliveries from the public utilities to a wholesale customers, and what i circled at the bottom are the key years of the routes over the last 30 years in california, the late 1970's, most recently 2007 to 2008. that is at the bottom of the graph, and you can see that we are at or approaching where our deliveries had been, so that means that we are doing a heck of a good job conserving and using water wisely, and we were basically flat from what we had in our 2009 deliveries.

we were averaging and assuming that was steady. that means we are not collecting as much cash revenue as early as we thought. it is a similar story on the retail side. they have continued to do additional savings. president vietor: can i ask you a quick question? does that mean that people are behaving as if there is a drought? it looks like right now they are parallel in drought conditions. >> it sure does. -- they are paralleling drought conditions. >> it sure does. there is also the economy, and we do have about 10% vacancies in office, using less water when they flush the toilet or wash their hands, and that is that we

just have less water uses. -- usage. we also look at how quickly hotel and restaurant sales are recovering. we're looking to see if there is any upsurge or uptick in economic activity there, because bakeries and breweries use more water, and offices use some come in residences use some. -- use some, and residences use some. i know commissioner torres is monitoring the situation, as well. this shows the actual rates we have adopted, the rate changes we have adopted, and the yellow is showing that we stay and are

able to stay -- we are able to do that on the retail side up until 2013, 2014, just as planned. now, once we get to 2014, 2015, because we have lower deliveries to retail customers, if that trend continues, we have to ask for a 12% rate increase for fiscal year 2014-2015. that 2% additional need is because we're using less water, not because costs went up more than planned. and there are the three key factors.

those include how cheaply we are able to borrow debt, whether or not the rest of our budget is growing or changing, and water delivery, as well. those are some of the things that are outside of our control. the other option we have is how we calibrate our cash-funded programs, because some years, we work more in debt, and of the years, perhaps, we spend less, we do we work more in that boat, and other years, perhaps -- because some years we work more in that, and other years, perhaps, we spend less. the water 10-year outlook, the wholesale customers are on the next page, page 10, and it is the same layout here, what we

have already adopted, showing the percentage change as well as the dollar per unit, and what i think is especially important is the two circled areas. we have an average rate almost exactly what we set one year ago. the reason we are able to do that is because we have locked in low-cost, fixed-rate debt. we expect to have a very successful situation. about $524 million. that is slated for tomorrow's calendar. if i can draw your attention to this one road dealing with fiscal year 2012. -- this one wrote -- row. based upon the fact that

deliveries are down so much, we need to have a rate of about $2.61, so that would be a rate increase a little sooner. others are seeing similar drops, as well. it will not be a big surprise, but, nevertheless, it will likely be sooner increase than was previously expected. one year ago, we needed about 10% in fiscal year 2012, and now it is kind of the reverse. we need 35%, 36% in 2011 to 2012, and then it can go down. these are projections based on what you saw in the first quarter financial report, and only if folks do not do an even better job of conserving or using less water. if folks use less water, these

numbers would have to change again. we will look at this every month between now and budget adoption. president vietor: police. commissioner torres. commissioner torres: you are right. i am taking the position of the rate payer in this. what about in respect to the rates? >> with our system reliability goals, in addition to that, some individual ratepayers can actually see their bills go down if they are taking advantage of our low flow toilets and our rebate programs, so different customers may actually see a decrease in their bills, and others would be an

average increase. even with our projected increases over the next several years, if you look at average bills of the bay area community and also other major utilities, portland, seattle, phoenix, san diego, we still fall in the middle of the pactp -- ack. -- pack. commissioner torres: it is the communication and education of consumers that continue to need to be a priority. their rates may decrease. >> you are right. every time we send out bills, they do periodic reminders of the programs. we also offer low flow fixtures and shower heads. commissioner torres: i have received that communication.

i just wanted to highlight that. the bond? >> it will be right at $524 million. for the bonds, we are going to do about $350 million of build america bonds before that expires on the 31st. commissioner torres: what is the bond rating for san francisco? >> we are ataa. we are at -- we are at aa. commissioner torres: we do not have to borrow money at the same high rate as the state of california? >> that is a great question. there is a whole page on that in

at report, to highlight how we are being efficient and effective on our financial metrics, so we do have a portion on that. i think folks will be surprised, because our average cost of borrowing is really less than what construction inflation has been, so being able to borrow now, what we sold bonds last time -- like we sold bonds last time -- the market right now is somewhere in the mid to high fours. commissioner torres: i think it is important to not only concentrate on conservation efforts lead to lower rates but also that we are not be penalized because of our bond rating. there is the increased cost,

which adds to the debt to california, now $28 million, and increasingly in and day out. -- and increasing day in and day out. >> moody's just confirm our reading. even -- our rating. they knew this commission and also the general manager and the city, the way the city runs the san francisco public utilities commission, we are financial managers that take whatever methods are necessary to keep those financial statements strong, and that is why they can to affirm our rating. commissioner torres: we have a story to tell, and we need to tell it. >> we will highlight that, as well. president vietor: i have a follow-up question on the

conservation issues equals lower rates, because there is a conundrum here. the puc has a budget shortfall, and we want to reward conservation, and encourage conservation, and people have the low flow toilets, the low flow shower heads, i have done everything i can, and that is one question, and the other is, in order to do that to some extent, you need to invest in these and then get the rebate, so you're actually putting money out to eventually get some savings, and you are sitting water ultimately, so i guess i just wanted to address those two, and how we can discuss this to crack this not -- nut. >> we showed conservation

information. in the case of the individual rate payer, for those who already have a high efficiency toilets, their bill is probably as low as it would go. it would be a lower dollar amount than if they had not done the high efficiency toilets. what that means by 2018 and 2020, 2025, we are able to live just as well but using less water, so we can do that. i think it is a community of view and also check book of view. -- a community view and also a check book -- checkbook view.

>> they knew that rates were going to increase substantially. while that is going on, we are also having the conservation that is also exacerbating some revenue issues. people will be paying higher rates, because there will be a more stable and secure system. president vietor: we really appreciate all the conservation effort to build a stronger system in the event of an earthquake, and please continue to conserve. >> when we came to you about the last town hall hearing in july, we showed you about the bills, so we will bring that back to you as part of the budget hearing, because the story is a really good story. over time, they do level off,

and they should be much, much lower. >> if i could recap part of this. what we're saying is we are down on water usage. we have had a reading increase, and we would rather not go back to go through the entire process to increase it more than that, so we are saying that is a fixed rate. we are looking at our wholesale customers come in mr.rydstrom -- wholesale customers, and mr. rydstrom said -- we should consider that the sale of water or the purchase of water, the commodity portion of their budget is often only about one- third of their budget, so even if we are reducing the rate

increase, it is one-third of their budget, so it includes all of the rest of the things, but we have already cut 4.6% acela rizzs, so we are already furloughing people. -- but we have already cut 4.6% in payroll. this is something we do not normally choose to do, and we will probably be coming back to you with additional cuts. they will try to stay within those parameters. you may have to decide in january whether the cuts will presented to you are more than you want to see and whether we want to revisit something else, like different things with the rates, because we are looking to be able to stay within the revenue side.

the water budget will monday it to stay flat. just to present that out there. >> and we will roll that through the next tenure so you can see that. >> i think this, and probably applies equally -- this, and probably applies equally. -- this comment probably applies equally. at some point, you have to get to what is really happening here. i think we had talked before about trying to come up with a presentation that was more easily transparent, and understandable, by our

customers. something that shows operating, for example, over time. maybe staying the same or decreasing. with the various initiatives that we have had, people support it, and you can actually see layer by layer of what is. when you first see it, you are, "what is that?" especially when we get into the third year of a five-year plan. when you're looking at 30 years and 30% accumulated rate increases instead of just the first year of 10. so i think to get into the budget, if you can take a shot at that, waste water and water,

i am not sure how that would work. >> we have done just that. i am excited to get back to you. on waste water, that is the next slide. this is a slightly different story. the key considerations again on the impact of lower water sales. we are about $5 million to $6 million lower in revenues for the next five years annually. so our assumption is that we maintain the five-year rate adoption, we live within our existing rate plan. we are able to borrow money so inexpensively right now, it is really helping the ratepayers. we're also getting bids that are 10% or more under, and things

might be sped up in the system. in the case of waste water, they will have to increase the cash funded. we may be able to, perhaps, cash fund a little more. we are continuing to review every hiring and job offer. what went out was about keeping a flat budgets -- a flat budget, so capital is already planned. our cash funded capital program was $14 million in the current year for waste water, and we have already adopted to increase that in the second year budget,

i.e. the 2011-2012. so we are already moving up in the cash funded program. savings environment. the preliminary outlook for the years not shaded in yellow. we could be looking at lower rate increases by 2000. that is where we want to recalibrate the timing or perhaps locked in savings sooner. as you have adopted the operating budget, right now on it is slightly better.

the combined bill is roughly flat year over year. one problem that is largely self is on the waste water side. we are continuing to constrain the budget and not let the budget grow to live within our adopted range. this is unique to the power operations. these are self supporting. they're covered by cost recovery is. the fund balance is projected to be depleted. by june 2013, we are projected to have no reserve if we hold spending as currently projected. based on present trends, that is

when we would run out of money. the net operating surpluses $35 million a year. we will talk about that and the next item. this is $35 million above the surplus. surplus. the 10 yearñ  plan that we adopted and we challenged to show what the balances regardless if we have money to pay for it to show what the structuralok options ae of unmet need that could not be cash find it. we will talk more about that later on. we will limit cash funding in

particular. we have a hold -- for our rates. we have an independent consultant as required by the charter to look at those rates. we separated out the financial aspects and we can look at borrowing to cover the shortfall. on this one, we have issued instructions to have roughly a flat budget which would likely be -- as well!u as -- power. what is most important for us is to hear from you if there are different programs and policies an