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6.2C Page 6 1. Overstatement of Return on Water Enterprise Rate Base. in FY 2007-OS, the retum on the Water Enterprise rate base included in the Suburban Revenue Requirement was overstated by $537,700, as a result of incorrectiy treating certain capital additions funded , through the 2006A Series Revenue Bonds as having been funded through fhe 2002 Revenue � Bonds. The calculation of the correction is shown on Attachment B and the adjustment is � shown in the Compliance Auditor's report on the Statement of Changes in the Balancing Account as of June 30, 2009 issued in August 201 �. I 2. Ca ital Grants. Durin FY 2007-08, the SFPUC capitalized assets whose . p 9 ' construction had been funded, in part, by federaf grants in the amount of $3,659,109. Sections 4.06(b){i), 4.07 and 4.08 of the 9984 Contract require the exclusion of grant funded assets ' from the wholesale rate base on which the Suburban Rurchasers pay depreciafion and reiurn. The calculation of the amount by which the wholesale portion of the Water Enterprise rate base is fo be reduced as af June 30, 2008 in order to reflect these capital grants is shown on , Attachment C. ' 3. Impact of Correction to Rate Base Reflectina Grants on Suburban Revenue Reauirement for FY 2007-OS. 7he Suburban Revenue Requirement includes depreciation and reiurn on the wholesale rate base. The reduction of the wholesale rate base as of June 30, 2008 described in Section 2 results in a corresponding reduction in these components of the Suburban Revenue Requirement for FY 2007-08 of $76,486, as shown on Attachment D. At the same time, the parties recognize that, when calculating the Suburban Revenue Requirement for FY 200T-08, the SFPUC treated the amount of a grant for improvements to - the Millbrae Administration 8uilding (to be excluded from the rate base as provided in Section 2) as a direct credit against the ending Balancing Account for FY 2007-08 and that this treatment was reFlected in the Compliance Auditor's report for that fiscal year. �n calculating the Suburban Revenue Requirement for FY 2008-09, the SFPUC changed the accounting method by which the Suburban Purcf�asers receive the benefit of capital grahts. Rather than treating the adjustment as a credit to Ehe Balancing AccounE, the new approach reduced the net baok value of assets by the amaunt of grants received. In � order to apply this approach consistently, the Balancing Account credit previously given in FY 2007-08 of $461,670 rrtust be reversed. Oecember 20, 2010 Final 2 2630358.1