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Be Page 2 Water Supply Assurance - In its City Urban Water Management Plan (UWMP) the City has previously determined that the City has a relatively low level of water supply reliability. The City currently purchases all of its potable water supplies from the San Francisco Public Utilities Commission (SFPUC) via the Hetch Hetchy regional water system and its demand for water has consistently exceeded its assured supply of water from the SFPUC, with demand exceeding assured supplies in five of the last six years, ranging from 99.5% of assured supplies in the single year during this period that assured supplies exceeded demand, to high demand of approximately 112% assured supplies. There are no adverse consequences to excess demand as long as Hetch Hetchy system supplies are sufficient for all SFPUC customers; however, in the event of a system-wide water shortage, water costs will increase significantly. Pursuant to the various agreements it has with the SFPUC, if the SFPUC declares a 20% water system shortage, the City will be required to reduce water use by 30%. This reduction would be accomplished through economic means by increasingly higher water use penalties that would be imposed on the City by the SFPUC as the City's water use exceeded its water allotment. It is expected that these penalties would be passed on to consumers in order to induce them to curb their water use. Moreover, in its UWMP the City has determined that the City's water reliability will deteriorate in future years. Total water demands on the Hetch Hetchy water system are expected to grow and water shortages are expected to increase in both frequency and magnitude. Additionally, the City's wholesale cost of water is expected to increase by approximately 300% over the next 10 years as the SFPUC passes future capital costs to upgrade the existing Hetch Hetchy system on to regional water purchasers. Confronted with a relatively low level of water supply reliability and projected increasing wholesale water costs, the City initiated planning efforts to meet its goals of providing its water customers with high quality water, at a high degree of reliability, at the lowest possible cost. In 2002 the City began implementing water conservation measures and began investigating the feasibility of implementing a water recycling project for landscape irrigation and industrial uses in order to reduce the City's dependence on SFPUC water. The City Council authorized staff to proceed with the water recycling project in August 2003, approved the project plan of finance in January 2005, and sold bonds to fund the first phase of project construction in 2005 and 2006. Water Recycling Project - Phase 1 of the project consists of the construction of water recycling equipment to be installed at the South Bayside System Authority (SBSA) treatment plant, a pipeline and pumping distribution system to be installed east of US 101 in Redwood Shores and in the Seaport, Sayfront and Skyway commercial and industrial areas of the City, customer site retro-fits, and the installation of synthetic turf to reduce the use of water for irrigation purposes. This portion of the project will be implemented through 2010, and will be capable of delivering up to 2,000 acre-feet of recycled water per year. Total Phase 1 estimated costs are approximately $72.4 million. Phase 2 of the project, totaling an estimated $12.8 million, will extend the distribution system west of US 101 if demand warrants. The project will be designed to 2