transmission and distribution facility upgrades. why this is now possible is because we will have had a track record, if that two pennies over two years is adopted, it will send a message that just like the puc has done those adoptions, it will support capital improvements. however, two pennies is not enough to allow for any restoration of the public program cuts we had to make. it would still be at lower levels than what you might like for renewals, city-owned renewals.

let's take a look at how this looks for your fiscal health. just like the previous slide, you always want to be above zero, in black territory or positive reserves. what this would do, this baseline option, is it would take that dark black line that falls below zero in the status quo and it would raise that to what you would see as the solid red line. that is if we had a current operations and if we said yes to community choice aggregation. if we said yes to community joyce aggregation, it would be adopted black line. two pennies can get us a long way. we can say yes to cca, in

bringing hetch hetchy into financial balance. we could go into the bond market and get low-cost financing for power transmission and generation facilities. >> what does the black line represent? >> the black line is the current operations. if we continue the current operations at the subsidized rate of 3.75 since, we run out of money because costs are above that. that is the status quo, where we are today. if we knew we could do that for a few more years, but the time has come where we need to revisit this. and we need to revisit it because one of the recent things that was passed by the board is the full implementation of a two-year budget, where the puc,

we have been doing a rowling budget for the last two years and we were early supporters of proposition 8, now the city is moving our department to a six- year budget. we will be proposing the budget in a two-year window. that would mean we would potentially have to address, have to revisit municipal rates. especially if we were also addressing the possibility of community choice operation. the other key option that we need your assistance in helping us perfect the proposal is that which allows for restoration funding of those key programs that i know are important to many. this option is highlighted on slides 10 and 11. we would essentially need four pennies per year for general

fund power sales. alan allow us to do everything that the two penny option did and had money for the full restoration of city renewals and energy efficiency by 2016. over the next four years, that would lead to a full restoration. graphically, slide 11 shows you how that feels. again, our reserve policy states that the commission should adopt rates that, by the end of the 10-year plan, allows us to achieve that prudent level of reserves. by the time you get to your 2022, we are satisfying the required reserves. on our side of the budget, it seems to make sense that it is either two or four pennies. the level of our programs that

we fund is a key variable. to our customer department, you can see what this will mean to their budgets. what i have done for you on page 12, as we go through the municipal railway line, that would be $1.3 million added to their budget in costs. their budget is about $800 million. adding $1 million to end $800 million budget would be less than one-quarter of a percent. a very small percentage of their budget. nevertheless, it is serious money. in the case of the public health department, their budget is $1.8 million a. this would add costs of about $600,000. it would be even less than a fraction of a percent. while the dollars are large in million terms, as a percentage

of some of the budgets we are talking about, they are relatively small. the options are two. the base one option will bring us into financial sustainability, allow you to say yes to cca, and we will balance hetch hetchy long term in the next financial plan. saying yes to the restoration option would also allow the commission to add to the public benefits and our programs as well. both options allow funding of clean power sf and send a strong signal that the commission is serious about adopting financially sustainable rates, just like they have already done on the water and sewer operations brit hume -- on the

water and super it -- on the water and sewer operations. what the model assumes right now is what i have outlined for you on page 14. our current budget does on a lot of good programs. for example, we are funding $11.7 million in city-owned renewals. you can see on slide 14 that we can also see how the restoration funding would ramp that back up to a level that is $1 million more than what we are funding today. long-term, it gets us back to where we are today. the fairness board has also reviewed these options for it we are still perfecting what the

final proposal would be. it would need to be a combination of these two options. in order to propose to you in for final deliberation what the final rate needs to be four city departments that are subsidized as well as enterprise departments. the rate awareness board will meet again and their proposal will be submitted in advance of your december 13 meeting so that you can read about it and deliberate it as well as hear their comments on the meeting november 13 he it the other key things we are watching and one of the issues that could affect hetch hetchy is the california renewable energy resources act. that basically means that we are a large, publicly owned hydroelectric generator with

more than 70% of our energy coming from our hydro power. to the degree that we would have to buy additional energy, we would be subject to renewable energy, which is slightly more costly. which are always watching what pg &e is trying to charge us for transmission and distribution. lastly, the assumptions here for the community choice aggregation have all been $19.5 million. that is predicated upon us not having an onerous performance bond requirement that comes out of the california public utilities commission. that is still under consideration. two options. we need your advice. we want to help perfect whatever your comments are into a proposal that you will hear december 13. commissioner vietor: i have a

question on the two-cent option. would that allow for the restoration of the nobles and energy efficiency? could some of that money be used for that beyond capital financing? >> we could look at that in limited degree is. we could not do that for go sao -- for go solar sf. for pv solar, we would consider that and look at. for energy efficiency, to the degree that they are in facilities we own, we could also look at that. commissioner vietor: what about community choice aggregation and local build out? could some of that money be used for that as well? >> we would need to analyze that investment, that bond rating.

how much and when it would be needed. the two pennies is just enough to address what you have adopted. anything extra is going to be more than two pennies. not to say it is not a good idea, but to penney's is our bare minimum. the bonding is not the problem, it is the revenue that is going to pay it back. commissioner vietor: thank you. commissioner moller caen: looking at slide 12, granted it is a small increase, but the total dollar amount is going to be shocking. how do you feel that we could

negotiate that? he >> it is definitely more shocking at four pennies than two. that is why we wanted your thoughts on what the book and options would-be. -- on what the bookend options would be. we are a $6.5 billion entity. the entire general fund is $3.3 billion per year. if one penny is $4.5 million, not to say that it is not significant because every dollar is significant, but this would be a discussion with the mayor's office as well as the board of what the importance is of the hetch hetchy system. everybody understand that the costs we have now are incredibly low. there are the best bargain we have right now, especially compared to pg &e.

policy makers understandably could not forever sustained rates below cost. it is a matter of how they can fit them into the budget. we are all hoping that an economic recovery helps the general fund growth over the next few years. that is yet to be seen. commissioner moller caen: -- president moran: a lot depends on how the mayor rights his budget instructions in. if they anticipate this increase, it may be shocking to the budget as a whole and the mayor's office may have to think about that for a while. as far as individual departments, it would not necessarily upset their efforts. >> there is also one mutually beneficial issue here that the mayor's office and the board will appreciate. you have asked staff to present to you so that we can satisfy

our reserve requirements. if we do have a hydroelectric facility go off line, a powerhouse, whether it is one or two generation units, that could be an emergency expenditure request of 15-$30 million. there is no other place to ask for that money besides the general fund if we do not have reserves to pay for it ourselves. we are operating the water and power system for anything but a public benefit to city department for it i think that that is a point that they appreciate and will understand >> the other part that seems to resonate with policy makers is that if you -- you should charge what it cost to provide power as a conservation incentive. this is what it really costs, folks. he will have more interested in turning off the top -- turning off the lights and doing things

that you do in four energy conservation. some of the things we cut, that lets us take people's revenue and aggregate it back to them. that money goes into the department's chang for energy efficiency and conservation. it abrogates it because none of them have enough to do a lot by themselves. but we can go out and pay for new lighting systems, things they would want to do if they had the money to do it. a portion of this gets funneled right back into the budget. not all of it, but a portion of it does. >> the start me as interesting that the increment to restore the environmental elements is about the same size as the increment required to do community choice aggregation. i know we do not want to get into a thing where we are playing one against the other,

but what helped me characterizethe wtwo, -- what helped me characterized the to, you can do one or the other. >> if you're looking over 10 years, every penny hearings in $4.5 million in. if you look at the solar energy efficiency, over 10 years, we cut $90 million. two cents brings in $9 million. over 10 years, that restores the $90 million. the cca is $20 million. hopefully we will never after spending. president moran: the others thing that struck me is that after all of this, we are still not back at cost of serviced. >> you are right. we are getting closer. president moran: it is about one

penny difference. do we know what it would look like if this were 50 years. >> this gets us back to what i call smoothed cost of service. we are allowing ourselves to pay for large capital and infrastructure investments that have a life of 40-50 years with 30-year bonds. that is how it keeps it in a balance. the operation of the three you oversee has been the one that has been held to the highest standard of all cash funding, because we have not had a bond credit rating. this would allow you to a knowledge that enterprise department would still continue to pay pg &e rates. that little bit of extra had room -- extra headroom would

allow us to continue our public our programs and maintain reasonable rates. assuming the weekend bond fund the capital infrastructure. we do well in our capital enterprises as far as creating enough money to pay for operating costs. where are short, has come from is that now that the goose who laid the golden egg is 80 years old, here we need upgrades to substations or transformers. those are big cash investments that we do not have the cash to pay for. >> two other thoughts. the 8-9 cents our judgment calls. for example, we paid for the street lights. is that an appropriate thing to have a wonderful cost?

you need revenue to pay for that. is that something that public health pays for? or does someone thinks it should be paid for differently? all of the cost that it takes to run the place should be taken equally. once you get past about 8 cents, it starts getting into more interesting discussions about certain things -- about how certain things should be funded. about four years from now, our costs will have gone up. i am not sure when we catch up to that. it does start to raise other policy calls. the money we are asking for now is safely including the things that people would agree are the costs that they would want to participate in. when you get higher than that, you have to have additional policy discussions. president moran: the world does not end in 2020 to either. having another penny at our disposal to deal with it would be prudent.

>> i know that we had talked about making the rounds and i do not know what that looks like, but talking about -- but talking to the supervisors, the mayor's office, some of the budget falls -- some of the budget folks about the marketability of one penny, two pennies, 4 cents -- we have had to compromise to get to where we are so far. i am wondering if that is the next step in order for you to come back to us and say, this is the word on the street or what we have heard as far as eligibility -- as far as palatability of any kind of an increase. i do not know the best way to go

about that. >> we have already met with the budget staff and the mayor's office and we are starting with the supervisors talking about what this is. there are two in general responses. who wants to raise any money or have additional budget problems? however, there is a general understanding that you need to support hetch hetchy to keep going. while no one wants to see it, they realize that if you have not raise your rates in 10 years and you're doing work, you need some money to pay it off. there is a general understanding, i would not say there is an agreement. certainly, if that is what it takes, do we rolled into the regular budget discussion? the other general response is, if you're going to make as raise rates, do not just do it to make yourself whole and leave all the programs we care about starving. if you're going to raise your rates, raise them enough so that we can restore the kind of things we care about.

probably teh -- the two cent option will not give us enough help. especially for those programs the board has enjoyed being a part of. we have talked to a good number of the board members already. >> that addresses these aggregation and conservation issues and takes the longer view of where we are going as a city around efficiency and renewable help sufficiency and the bottom line in the long run. power saved is power sold eventually. it is taking a longer view. that is where i would land on two versus four cents. it is the higher number, because

of what we would be able to gain back. >> one of the things that is correct about the situation is the impact of doing two versus four is a general fund impact. it turns out is it is also -- it turns out is also a financial fund impact. the people who really need to decide this are the mayor and the board of supervisors. we need to present them the option of doing what we think is the best thing. i would also lean towards the four cents. they will have to figure out out how much the general fund can afford and how valuable are the other things we want to find. >> there is also the point that it does not even cost service yet -- it does not reach the cost of service get rid is still low. >> we are also meeting with the major departments to let them

know and start to have that conversation. >> if you look at five cents over five years? >> that would cause us to be in excess of our reserve policy. not that i would not like to have that extra cushion, it does not actually require -- >> and we could take care of that in an instant. all we would have to do is make -- is moving the transmission projects for a couple of years. >> the other key point, if i may get some direction from the commission, the rate increase and the duration of that increase send a very strong signals. when we last went for a five- year rate adoption for the sewer rates, that was a good indicator to the bond market and we are in the business of sustainable, long-term rate setting.

it would be a duration of four pennies over four years. would something like that with the fifth year being black, no further rate increase, following a similar process of a five-year rate cycle, would that be of interest to the commission? >> yes, i think so. >> that would also help us. the clean power sf would be a 4.5 year contract. >> i want to thank you for this piece of work. 43 years now, i have been on the commission. i have heard rumblings before that this has been an issue and it has taken some time to get to this point. it is not an easy conversation to have. i appreciate all of your hard work. >> i am happy to do it.

thank you in. president moran: we need to have public comment. and then i would entertain a break for about five minutes. mr. brooks. >> good afternoon. eric brooks, representing the sand for cisco green party. -- representing the san francisco green party. talking about the build out fo a clean power csf, -- for clean power sf, when we met with south, we said we would step up to the play to help fight for these increases in. not only because of some kind of cynical tit-for-tat, but because getting renewable energy in the city, getting cca to work

properly, is dependent on making sure we are paying cost. conserving electricity is less dependent on getting people to pay real costs for electricity. we have done that on water for decades. we need to do it with electricity. the other key reason that we, as advocates, are ready to step up, and we want to make sure we can step up, is to make sure that the task order for the scoping for the build out of work is fully engaged within the next couple of days so that we are under way. fully fleshing out all of the locations in the city, including city college building, hospitals, etc. where we can get strong efficiency installations, renewable installations, demand response, those things over the long term are going to create revenue streams.

so that we can look over the course of three, four, five decades and go to these departments that we are saying we are going to increase their rates with a package that saves them money on the actual in -- saves them how much electricity they actually use because we have done the bill out work in a comprehensive way. and we know where our opportunities are in the city. that enables us to go to these departments and say yes, we are goi for your rates, but here is where we are willing to save electricity or generate it off your roof. that is why the bill the work is so important. it will give us a picture of the entire city, including all the municipal and state buildings. >> and that is the last point i would bring outup, we don't wano lose other advocates that we need on this.

unlike city college, as you know, the president of the community college board is also very strong in community choice segregation. as soon as i brought this up with him, he said, how can you raise electricity rates on city college? we need to use the build-out work, use good scoping and a decade-long planne so we can goo the hospitals and schools and show them something that is going to work that is not going to hurt them. we don't necessarily have to put the full two cents like a flat tax on everybody. with the mta, we need to make sure that we are not rising electricity so high that we are discouraging transit. [chime] that is where the