the source improvement program which you heard a lot about, if we tried to size it today, we would think it cost about $4 billion. but inflation happens over 20 years. depending on how we do this improvements, it could reach as much as $7 billion once construction cost goes up over time. the proven, a media needs for design, as well as the immediate investment for the treatment made net cost. we are increasing the collection system for line item replacement and doubling the proposed budget before you. that would prevent potholes' from occurring and other street

disturbances. sourcing is predominantly revenue bonds and we are able to pay in cash about $37 million a year. there is a further bit of good news -- the ability for us to get grant dollars from the state. it was on-again, off-again, and now it's on again and we have an award letter that we believe the money is going to happen this time -- $24.1 million. that is a success from what voters approved. every time we look at a capital plan, we are trying to figure out the cheapest, lowest cost source of funding and that is how we prioritize each of the approaches. in the case of hetch hetchy

water and power, are improvements are primarily for the regional pipelines to the up country system. the majority of uses is in power infrastructure. you will see in the mid -- in the middle of page 29, you will see the investments and these are critical investments in the generation and powerhouse. you have funded in the past the rewiring of the generators and these are critical because it basically allows us to create a $150 million revenue stream we would not otherwise be able to do. that allows us to provide what is very low-cost power to city

facilities and a hospital. thank you for that. the other investments are streetlights toward the top of the page. we are investing more than we have in decades. thanks to you and the mayor's office and policy-makers, we have been able to implement a twopenny ratings increase that allows us for the first time to do power revenue bonds for fiscal year 13-14. i want to go through to brief slides and also through page 35 -- supervisor chu: items 6 and item eight, the appropriation is about $141 million and the

remainder is a much larger one. can you explain that? >> the remainder is water- related bonds. in addition to that, we were able to apply to the state and have been successful in getting loans funding which is low-cost funding, cheaper than revenue bonds. we have some cash from the system which allows us to fund a portion as well. the lowest cost is what we are always trying to prioritize. supervisor chu: back to waste water -- the appropriation is a large number. it's about half a billion dollars. can you break down how much of that is eight digest verses

other work? >> it will be approximately $168 million. that's for the planning of the digesters project. that could be upwards of $2 billion. it matters of a lot that we do it well because our sister agency across the eight -- east bay mud, has done an incredible job and we plan to do it well as far as creating capacity to be able to provide renewable electricity as well. but there may be the potential to do even more.

supervisor chu: what is the remaining? >> an increase toward 15 miles -- that is $114 million over the next two years, including the doubling of spot repairs in the city. the other portion are maintenance and repair and replacement at the waste water treatment facilities and a potential for long-term as well as short-term needs at treasure island. >> thank you. >> we are subject to the rate fairness board, another strength of san francisco's oversight process.

this translates into an average build. we have rate affordability as far as the average cost of a gallon of water to bring it down to your tap is less than a penny. by the time we do all these improvements, it is going to be less than two pennies. a very good deal. to flush the gallon of water down the toilet or put it down the drain, it currently costs a penny to make a clean and go out into the ocean. those are some of the metrics we used because our customers work in gallons. >> can you speak a little bit about what that would look like? for the waste water, if we were to issue half a billion dollars to do the work on digesters and the disorder replacement, what does it mean to an average

household? not by pennies per gallon -- i don't think i'm fleshing to penny's down the toilet, but what are you talking about in terms of an average bill? >> i can show you that on slide #34. over the next few years, it would mean very little because we typically have two or three years of capitalized interest. that will mean we have on $500 million of project costs, depending on how low we get the rates, anywhere from $45 million a year to annual debt service. why that doesn't have as much impact as you might think otherwise, the big area, the potential rate impact, why it doesn't have as much impact as you might think is because we have old bonds being paid off.

those are helping us over the next two years fit in with additional investment and borrowing we are benefiting from very old bonds being paid off. where the big decisions will be that affect long-term rate affordability is once we ask and come back and propose the timing and sizing of the construction of the digesters as well. >> -- this graphic takes a walk over the next 20 years and says what you see before you in our 10-year capital plan, we go out 10 years, but that would look like. we have a pretty affordable deal at about $40 a month. this makes us at about a penny per gallon of treated sewage.

that is projected to go up to about $60 a month by 2019. the reason it stays that affordable is because the old bonds are being paid off and we see here is able to be fit in and stay affordable. but the big decisions are going to come around 2013 and 2014. anytime we need to make a key decision, it has to come back for appropriations and bond authorizations and it has to be approved by a supermajority. supervisor chu: this is an extremely scary graf, to think we're going from $40 to $180 over time. islanders have a large part has to do with the you are making assumptions about what the total cost of the sewer system

improvement program will look like. a decision has not yet been made that would put this into action. i want to make sure people are aware of that, but how do we level this number down? this is a steep increase and even though we recognize we have a large infrastructure problem that we need to fix, at the same time, this is a very significant increase. what are the strategies you will be bringing to lower this down? >> there are couple of approaches and a lot happens this summer. we're doing a validation process that revisits the scoping and sizing. the general manager is giving directive to the waste water team and staff to make sure we are taking care of what needs to be done, the soonest, the most critical. the age of the system, a lot of

it is 85 for 90 years old and the technology we have for treatment plants which are very large and they are at the need where over the next 10 years, but they are going to need a significant investment because they are nearing their useful life. it is incumbent upon us to make sure we right size it and time it and that is going to come out of our summer workshops with the commission and infrastructure team there is a lot more you are going to hear about this. supervisor chu: with regard to financing instruments, we have tended to borrow in 30 year terms. those are going to last us much longer than that. is it typical to borrow for a longer time or does the market

not afford that kind of term? >> there are two parts to that answer. if we were able to go out further, the longest we could go out is 40 years. whenever we can come we try to go out for years the easily the assets will last twice that long. in the case of the state revolving loan funds, they are only allowing borrowing up to 20 years, so we're working with their team to say here would be some useful changes if the state government wants to do something in public finance, it would be to link in those terms to more of a matching useful life. we will go out as long as we can. we are typically issuing fixed- year debt so that we can refinance them to a degree that would offer savings in a future year. we have taken the opportunity to

do that whenever it would save ratepayers money. but this is not just something we state. every utility in the country has this same issue. supervisor avalos: i know we have to build the source system and keep that moving, but do we see any real savings if we demand a strong recycling program? is that going to help to alleviate some of these costs? >> we are considering that in our low impact development, whether for rain water retention are swells, it helps us for temporary diversions so that much doesn't go down the pipe into the treatment plant and perhaps additional harvesting. we are doing that and that is part of what is before you today. if i may touch on that, with

this question as well as the other question -- the average illustrations look like a very large growth. they are in today's dollars terms, if i could turn your attention to slide at 35, inflation happens regardless of whether we do this investment over the next 20 years. what we have done to provide context to this is pushed the average bill in terms of what it would mean as a% of average household income. this is something that epa looks at when they do affordability in different communities and typically we see 3% inflation in the economy in the u.s.. at 3% inflation, everything doubles. someone making $10,000 today, if they got a 3% raise, it would

be $20,000. while it would be higher than 3%, it does level off. we know our customers are not at the average, so we have programs like the low-income programs that help. >> this chart shows the percentage of that sewer and eat -- to water and sewer. you are assuming it is growing by 3%. that may or may not be true. >> that is correct. in some years, and has actually grown more. not necessarily for everybody but the average has been greater. >> if you can turn to slide 36, luckily we are starting off at a point that is already one of

the medium-range bills at average family budget. you can see where we would significantly be over the next 10 years, we would projected to be less than the average bill. we have a very good system. it is cost-effective but it is old. luckily, we are starting off with what is a lower initial bill which will help our customers. >> thank you. supervisor avalos: i know we have a rebate program for buying devices that use less water. do we have anything being planned -- and mentioned recycled water, but for tap going into our trains and stuff like that.

>> we have a variety of different programs. >> on the general manager for water. we do have a variety of programs. when we are looking at this is a pilot program that we are moving into individual homes with gray water usage. we give large landscape grants to promote efficient irrigation. we are looking at ways to promote new developments > of 40,000 feet and how they can actually look at plumbing gray water into their facilities. >> and for existing households, we have a program as well? >> yes. we are taking water from laundry out to the art for irrigation

purposes. supervisor avalos: thank you. >> the history of most base -- most waste water programs as they wait until they have an epa violation and then they can blame the federal government for having to borrow money and going out to have to fix their systems as opposed to polluting the waterways. we have been trying to do it the right way and making sure we take care of the bay and the oceans and neighborhoods that we impact. because of that, the epa has not been on our case. the largest program right now is a philadelphia. as we look at it, we need to figure out what's right for our people and what's right for the environment and what we need to do to make sure we stay within the regulations of the united

states. what i would suggest when you ask about how the reserve money and stay involved in these discussions, we would like to have discussions a lot this summer and may i suggest what you might want to do is the money going into waste water is about half a billion dollars. the second portion is to under $55 million. if you wanted to reserve that, we could continue to do work next year and come back this fall and talk about where does the larger picture and what is the next 10 or 20 years look like? >> -- supervisor chu: i think that is something we can consider. we don't want to stop the project moving ford because we

want to move forward but we are asking our residents to shoulder a lot and asking them to see utility bills go up and pay additional money in sales tax measures and a more and parcel taxes. there are a lot of active costs that an individual household will be facing. it is incumbent upon us to make sure we're doing our due diligence, but to make sure the sewer system is working and just being cognizant of the financial impact they may have. >> i am very much in agreement with that. supervisor chu: perhaps if i could follow offline with regards to individual rate impact on a number of these because we have a number of other departments and issues before us up and i do want to move through it. i know that we have public

comment, so we can take action on the budget analysts revise reductions. harvey articulated they are not exactly the same as what is in the report. can we tentatively take that pending public comment? we will do that without objection. supervisor avalos: i did have a couple of other questions and they are really high level and slightly touched upon during the presentation. in particular, how what does the budget reflects the goals of the projects in san francisco? the next is on urban agriculture and what way the department is moving into that. there also questions about the transfer agreement between the

puc and the modesto district as well. >> we originally started the program with about $5 million and net dropped to $3 million. the budget shows $2 million a year for the next few years. we have been cutting everything, including energy efficiency programs and this reflects the lack of money in the budget because we need to make sure the infrastructure has to be kept up to speed and we just don't have that much money. in this current year, we were doing well until the middle of the year and there were folks who figured out a great way to have a small solar program with our subsidy. it became a free installation. it was not deleveraging we were hoping to get. we have been talking about how to stretch the $2 million as much as we can by making sure we

are leveraging the money appropriately and having it available for all parts of the community. you may hear from others that whatever we can do during the next year to figure out how to leverage it to make sure the program continues to grow. what you have now is we have dropped energy efficiency. we hope to make sure it is a productive program with whatever amount of money we have. on urban agriculture, i think there are opportunities to stretch dollars and there is discussion for the housing trust fund and i have been advocating for that for distressed homeowners and i see that geared toward a lot of households where we have single-family homes that

could combine and be able to stretch our dollars and it served a more diverse economic community. >> when we can leverage the money to make something happen, that's the best use of our money. on urban agriculture, we have selected two pilot projects. we are working with the school district to make it an education program. they have given us estimates about how much it might cost to make that happen. we are looking at a project and have been getting different ideas where we are trying to collect all of those thoughts into one place and make sure we don't have all these pilots wandering the streets. we want to make sure they are comfortable with how we are

doing it in terms of how the water is being used. we expect to be expanding that in the next year or two. >> to talk about looking at parks in the district and 11 area? lots of parts that could be activated in ways that could be beneficial in making sure we actually have economic activity where is happening. the last item was the modesto irrigation district transfer. when we did the impact report, we said we would be short about 2 million gallons a day over the next 50 to 100 years. the discussion was that every year is different. you never get one year that is

average, but that is over the length of the entire project. how do you have enough water to never make customers ration more than 20%? we came up with that number because when you have that, you really have economic hardship. we came up with the number and since then, working with fish and game and others, we have had to agree to let more water out of both crystal springs at them and alameda creek to the tune of about 9 million gallons more a day. the water we thought we had we will now have less of because 3.5 million gallons a day will be going down the creek.

we had been looking to try to figure out how to get the $2 million and we are now short the additional nine or 12 million gallons a day. it's not a problem when there is lots of rain but it is a problem when you have for years of drought. we have been talking to the modesto irrigation district. modesto and turlock take about half the water of the river. san francisco's share is about 15%. we are a much lower user of the water. it allows us to take more in good years. we can't just take it all the time, we have to take it when there is excess. if we paid them to do things that would use water better and

save water over time, what day be able to give us some of the water they were able to save? there are always concerns about water and when they see so much of their livelihood is based on the need for water. on the other hand, if you look at water issues in california, you need to figure out ways of having large urban areas willing to pay for water work with agricultural areas that don't have that much money so they can use water better this is a great pilot to do that. it is an insurance policy. in most years, we would not use the water.