thank you very much to the staff to carry it sounds like there is considerable progress on. he is seems like the mission changed somewhere along the line and this is not what you had in mind when you disbanded. i think we need to do this correctly with the benefit of the work. thank you for being here, for your testimony. we look forward to seeing this again. that concludes that item. secretary housh: the next item windy city department electricity rates and charges. future charges for city departments and other public entities. >> that will be equally fun to discuss. >> good afternoon, assistant general manager and cfo. over the past 12 months, you

have had a great deal of deliberations on the san francisco water and power operations. you charge the staff to measure -- to review the measures we need to take to ensure financial sustainability of our operations. the most recent charge you gave us was to come back to you to review what the options might be for rate-setting for city departments, in particular, to move towards the cost-to-service recovery. i have 15 slides to briefly walk through. i would like to frame its -- what this workshop does today is provide you with two options that we believe would make this financially stable long-term. that being said, we need your input and would like that to help staff perfect what would

be the city department municipal rate that we would ask you to deliberate on for adoption in the december meeting. the slides here go through some background information as well for the viewing public. much of it will be a repeat for you so i will go through it quickly. we provide about 1.9 million megawatt hours. in we are having our clean green power on the municipal railway, san francisco general, city hall, and the street lights. the chart on the left shows the delivery of the clean green power. in the case of the water and power project, the water portion of it is fully recovered from water customers. the power portion of it is recovered through rates charged

through city departments as well as other users of our power. you can see that the enterprise department here provides the lion's share of the revenue. those are rates that are equivalent to no more than pg &e's rates. the city has reviewed power rates for city departments for a number of years. slides three and four go through a brief history of some of the things that policymakers have reviewed over the last his 15 years. during those prior deliberations, they're at and policy decisions made that yes, we should move towards cost of service. voters reemphasized that in proposition e in 2002 when we were told by voters that our rates that we set for essential services and utilities should take into consideration cost of

service as part of that measure. in the past, we have begun to ratchet up some city department rates. however, we have not fully implemented prior policy decisions that were passed by the board to move towards total cost of service recovery. this is an opportunity to revisit that rate-setting process. the work that we do is based on cost. there is no profit margin in our electricity rates like there is for pg &e's rates. we are 100% non-profit and provide whatever we can to stretch the dollar as far as we can for our renewable portfolio. mainly, that is hydroelectricity and we also have pv solar and some purchase

power. the costs associated with our power and average about 9 cents per kilowatt hour. by way of comparison, pg &e would charge just about 14 cents per kilowatt hour. i want you to know that we have a very low cost, efficient production here, being cheaper than their rates. that being said, we have had in the past, a history of providing even lower costs to city departments that are general fund supported. that is a policy decision that can be made. financially, that is not sustainable when your costs are higher than the charges that we have. on average in right now, we would charge general fund for supported departments about 3.7 5 cents per kilowatt hour when our costs are about 8.5-9 cents

per kilowatt hour. that provides an implicit or general subsidy, perfectly legal to do so, of about $23 million. how that shakes out across the different departments is on the slide 5. i will walk through the rove for the municipal railway. there have been a general fund supported department. the municipal railway, which runs on our clean green greenhouse gas free power pays us about $4.9 million through 333 megawatt hours. our cost to provide that power is $11.3 million. for the mta alone, our subsidized power provides a discount of $6 million from what

our costs are. if the mta had to secure their power through pg &e, they would be paying $13.1 million. we charge them $4.9 million. they would charge and $13.1 million. because we have such an efficient, low-cost system, our subsidy bursa's cost is $6.6 million for it looking at the bottom of the page, our total subsidization, because our rates now currently set are below cost, it is about $23 million. the goose that lays the golden is often what i call the hedge hajji -- hetch hetchy local power system.

it has served us well for a number of years and we had been able to provide subsidized rates for public service like the municipal railway or general hospital, or even city hall. because our costs now on this aging system require us to invest more in maintenance as well as repair and replacement, that is not sustainable. this chart, which is the chart that you've reviewed as part of your 10-year financial and capital plan, showed that we would run out of money on the power enterprise by 2014-2015 unless we some how dealt with setting rates for municipal departments closer to what the cost actually were. the dark black line shows if we continued on the status quo, subsidized rates, how we would run out of money over 10 years.

the charter requires us, in order to do prudent planning, to show you this and show you what the rate impacts would have to be in a 10-year financial plan, just as voters told us we had to do in 2002. the green line also represents the level of proven reserves that you adopted as a commission that said on average, we know that things could go wrong. we could have a drought, and we could have a hydroelectric generator go off line, and what amount of money do we think we need to have in reserve in our fund balances to be able to bridge those emergencies. that represents about 15% of revenues, 15% of expenses, just as ms. lee in went through

earlier in your quarterly report. this starts with what you adopted as a commission with your 10-year plan. you have stretched your dollars as far as you could based upon the resources we have had. the charter requires that you look 10 years out. the last time you looked 10 years out, we were forced to make difficult choices. we had to admit that in the last part of the 10-year plan, we could not fully fund the city- owned city renewals that we might want to. that was a hard choice. we had to take a $32 million cut. we had to take a cut to go solar of $29 million. and a cut to energy efficiency. all three are important public our programs that are important to you as a commission and other shareholders. he those are 10-year numbers.

the shortfalls on the previous page are only as good as they are because we did make these cuts. we are still running out of money, even when making these cuts. what it told us is that the -- is that they are not enough. it only gave us enough money to get to 2014-2015. we knew we would have to revisit this. in addition, we have also done some deferrals for transmission upgrades. we are still funding of the essential facilities maintenance and the essential rebuilds that would upgrade transmission lines that we have a deferred. the options to bring this back into balance and to look at the restoration of some of those public our programs that we had to cut or defer on the previous slide are twofold. the first is, if we take the 10- year plan as it is today, with

those hard cuts we had to make previously and we assume that is as good as it gets, " with the rate increase have to be on general funds in order to bring hetch hetchy back into balance for this commission and the 10- year financial plan. two pennies over two years would do that. two pennies per kilowatt hour over the next two years and the balances in the 10-year financial plan would cancel out to make sure that we do not go into deficit or shortfall territory. this would also add, in fiscal year 2014, $4.5 million of additional revenue.

and $9.1 million of additional revenue every year thereafter in the 10-year plan. this would also allow you, should you want to say yes to the start of a clean power sf, the community choice aggregation system, it would allow for the availability of $19.5 million of start up money to come for hetch hetchy. it would also satisfied policies to make sure you are minding the hetch hetchy in terms of sufficient democracy. it would require us to go into the bond market to have capital financings for our large power 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.