coming online as well. today, we have three parts of the presentation. we have three slides -- we have nine slides from our independent rate consultant. under the charter, we are required at least every five years to do an independent rate review by an independent consultant based on cost of service. this is satisfying that charter requirement. in addition, we take that information and put that into what would be proposed retail rates. these are the rates specifically for the redevelopment area, not the general fund or enterprise fund. we will discuss that at your budget hearing. the deputy cfo will walk you through the slides from the staff proposal. lastly, we are joined today by mr. howard ashe, chairman of

the rate fairness board. the have gone two hours of review of the analysis of the projected operational needs. he is here today to provide their opinion on the rate fairness evaluation of the staff proposal and the san francisco public utilities power operations approach to proposed rate setting. chairman ashe will provide that summary. i will turn it over to mr. frank perdue from montague. >> good afternoon. i will cover a few of the affected -- president vietor: if you would not mind introducing yourself. >> frank perdue from montague and associates. i will talk about the objectives of the study and what we set out to do in the results of the

study. i also want to provide a few points that were already mentioned by mr. rydstrom about the quality of the utility and its costs compared with other utilities. with regard to objectives, the first step really is to establish the total costs of the power enterprise. we developed a model to address that. secondly, it is to allocate those costs to customer groups and categories. part of that process is using a revenue requirement model, what we call an enterprise model. we look at the whole power enterprise, its production cost, its financial cost, and understand the drivers of those costs. we feel in our work it is important to stress the cost and revenues. we work with power enterprise to do that. when i say we stress test revenues and costs, i am talking about what mr. harrington talked

about. right now, you have a very high water year. you want to know what that does to revenues or city's sales. at other times, you have a very low water year. you want to know what that does to revenues or costs. we work with power enterprise to do that. the model we developed with them involves setting rates for irrigation districts. you know the long-term capital plan costs. probably most importantly is when you serve electricity customers in the redevelopment areas, area, and understanding of what the costs are on an actual basis and the revenues, we build that into the model. as was mentioned, the goal was to get this to the development areas. just really two points on this slide. one was stated, we you have a carbon free resources.

these surrounding resources do not have that. because of those, you have a very low costs. if you look at the main points, the costs for the power enterprise averages about 9 cents per kilowatt hour which is very low. pg&e has costs that are much higher, about 15 cents per kilowatt hour. in santa clara, this part of the power authority, they have low costs supplied as well. they have very low costs: 9.4 cents per kilowatt hour. a couple of.

secundus slide. this is the overall process. this is a revenue requirement. what we tried to do is to take those costs and which are the power supplier costs. after that is done, we try to put that into categories such as energy capacity and a customer charge would be like the bills. after the step is finished, that is allocated to customers. the main focus of this

presentation at a study was the redevelopment area. to get up the costs, we had to do it and enterprise approach to break out the cost attributable to the redevelopment area. here on slight four which is before you, i will focus in on a couple of areas. the first day it is cost analysis. the enterprise has a total cost of service of approximately $95 million. this is before revenue comes in for enterprise customers but the total price averages over the

five-year is setting. . this is different than customer categories and you see the average cost of service. the costs are about 9 cents and you see this at the bottom. when you see customer groups have different costs. you see the residential customers in the area which have a cause greater than 9 cents. the reason for that i might take you back to the slide about the general fund, the load is very flat. the cost to serve is typically lower than the cost to serve of payload that has a shape to it.

if you take the highest demand slashthe average energy, the percentages like 5% where as your municipal customers are much much lower. there is a cost which is higher than 9 cents. there are also some customer costs. the other out lighter here is about having a very high cost and the reason is the capital association which was allocated directly to the customer category. as i have stated, this was a collaborative of effort with the power enterprise. we examined several different options to setting residential

rates after we went through the cost of service steady. option one and two, what these are all customers save for the energy. then there is kind of a progression where we look at the grids which typically provide a price signal so that customers can surf. this is the recommended option that we came up with. i want to walk through this a little bit. the customer charges $4 which each customer would pay. you would see kilowatt hours of use and you see three tiers theire.

then you will see different rates associated. what is happening here is the redevelopment area is that the average was supposed to be 130 kilowatt hours. a rate report describes these options in details. . we selected option number6.

there is a really good reason for the untypically your commercial -- for the typically commercial side. you have many and diverse customers. we did that as well. options 3 and 4 based on winter uses. we selected option for and we recommended that to the power enterprise.

the next two slides are really repetitive. the customer charge is important, the price signal is important so that when customers use more energy, they save more. winter service should be differentiated. this should include it in monthly service charge, $5 for -- phase service. these should have seasonal characteristics which is recommended.

it is the couple of other point before i close, in our report which we provided some information with regard to the general fund customers and enterprise customers, this provides the framework with the decision lakers their rates. -- with the decision makers to change those rates. we build plants to maximize the good things. that concludes my report. if there are no questions, i would like to turn it over. >> i have some methodology questions. the first of all, the presumption here is that we will provide cost-based rates and

that is in the charter which says that we will do this for retail rates. this does not say that we will do that for all rates the way that the methodology works is that if verdoorn lead -- if we have revenues in excess of costs, does that reduce the revenue requirement? which there reduces the rate which would be allocated to the redevelopment areas? >> i would agree with that. the study was to allocate costs to the redevelopment areas. if the enterprise customers arm charged the peachy any rate, we would not consider that specific and allocating cost to

the two customer groups. >> as i read it, you had a revenue offset which basically took the revenues from the airport and then deducted that from the revenue requirement for all other classes of customers. >> the chart you are referring to did indeed have revenue offsets. those were from surplus sales of electricity which was the main revenue of said. the second came from the two irrigation district. also on the river bed or is called the north industries development. we did not consider the revenue contribution from revenue customers although that data is

available. we did not use that source to offset the total cost. the that we wanted to determine what the cost to serve different groups was without regard to the rates currently being charged with the exception of the revenue offsets that i just mentioned. >> it looked to me like to the revenue of sets have the effect of taking the collections and crediting those against the revenue requirement so the total requirement was lower. incidently, when you apply that to customers, that allocated to the redevelopment area was also reduced. >> that is exactly correct. we did not take those from revenue customers to offset the costs. >> why do you have to do it that

way? what i'm wondering specifically is whether we can have a two parts of our business, one is where the rates are cost-based and the other is where we try to maximize revenues. we have fought very hard for a very long time, we have fought battles in congress and in the courts to preserve our right to charge rates to some customers not just on the basis of cost but on market value and did concern me if we are in any way stepping away from that. would it make more sense or if it would be permissible under this methodology to basically

segregated out the money-making part of the business and to take the load out and the revenue out and to have this totally separate. then to look at the rest of the business and allocate this. >> i may not be the best person to answer the policy question. >> for the methodology and cost- based, is it permissible to separate an enterprise into this? >> this allowed us to do that. [inaudible] ultimately this is a policy decision.

we did a rate steady some are based upon cost of service and how we can do that by offering a premium. >> i guess if i can synthesize this discussion. are we saying that the rights you are proposing would have the effect that any revenues and costs would receive from the district and actually subsidize rates? >> there is not cost subsidization we cannot sign any of this to offset any cost anywhere else. >> what we are recovering from is paying for the cost and the obligations that we have. >> if we make money off of them

, they are not being held. >> i'm not sure i agree with that parent tauchnitz -- i'm not sure if i recall with that. if we are making money from anyone, my reading of your methodology says that it does not specifically subsidize the redevelopment area. what it does is it subsidizes all costs of the rates. this does this as a matter of formula. if we are successful in creating profitable contracts with people, how are we

allocating this? we might choose to allocate this to the solar -- if we save energy in this building, we have a hard time recouping the cost because we don't have anyone to sell it to and a higher price. the options are limited. the more options that we can create to have high revenue markets, the more we can afford to do but in the conservation area. it makes more sense to preserve that capacity which we have fought for four decades. >> let's go back and look at a nature that we can explain which way we believed it is, if it

matches the explanation. >> you indicated the formula gave you the flexibility to deal with the methodology. hunters point might be paying more than most rate payers. >> actually for the relevant comparison, this is what the rates are compared to pg&e as compared to the rest of the marketplace. we are looking at what we can do and what we can provide for a green product as well as provide

incentives for economic redevelopment. we are looking at the ability to be able to propose this cheaper rate back and provide a clean product. >> in terms of privatization, i also agree with respect to conservation issues and where we can't find the necessary funds to do that. we can help the ratepayer achieve a more competitive rate. is there a formula you have devised to determine that? >> this is on slide 16 or 17. we did look at that because we took your comments for prioritizing and providing a green sustainable product and also a stable rate. that is what we took.

we turned this into a staff proposal. this is a great side -- segue. e*trade player class will paying for the green products they're getting and it might be a nice thing to segue to mr. perle. >> thank you very much. good afternoon. once the independent rate study is completed, what staff does

this takes the information and compares it to information, industry trends, that kind of thing. this develops a rate proposal for this commission. there is a residential side and the commercial side that i will look at. we work on this project to make sure that the policy priorities were taken into account. what you will see on the next couple of slides provide high- quality services promoting and green sustainable city and expanding our to occasions as well as investing in our community.

looking at the policy initiatives and focusing on our sustainability, resources conservation, asset management, the investments, looking at the redevelopment which is pertinent to the retail rate as well as work force development, we wanted to make sure that all of these things were on the table. on the retail side on the reach of residential side, the goalie had was wanted to make sure what we are proposing to you came in cheaper and greener than the alternative. we were able to achieve both of

those things. this provides an economic area because you probably know that we don't have any customers there on the the the retail or the customer site. this is an economic stimulus for the redevelopment areas. adding to years to promote conservation, the first two tiers represent the vast majority of the kilowatt hour usage and the vast majority of the customers. that third will provide the opportunity of finding additional green power purchases so that by the first day you should be able to provide 100% green and clear energy. those funds will fund the green power investment fund to purchase additional green

energy. there will be conservation and rebate type plans for customers. this helps to set aside some of the problems with a great shock this is recommended by the rate consultant and trying to fight the cost of race. that means the cost during the summer would be higher than those during the winter. we will propose low income discounts of about 30% off the retail rates that will describe

any moment as well as the medical assistance program for those customers that relied on electrically powered devices. in terms of the rate proposal perspective, what it shows is the proposal on the right reflecting the 10% savings over the pg&e rates. this is different than the rate structure from pg&e which is being consolidated into a three tier system. they all have the same numbers. they represent that those are in a single tear. our customer service charges include customer service and billing related