Agmt11 City and County of San Francisco SFPUC

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1. Overstatement of Return on Water Enterprise Rate Base. In FY 2007 -08, the retum on the Water Enterprise rate base included in the Suburban Revenue Requirement was overstated by $537,700, as a result of incorrectly treating certain capital additions funded through the 2006A Series Revenue Bonds as having been funded through the 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 2010. 2. Capital Grants. During FY 2007 -08, the SFPUC capitalized assets whose construction had been funded, in part, by federal grants in the amount of $3,659,109. Sections 4.06(b)(i), 4.07 and 4.08 of the 1984 Contract require the exclusion of grant funded assets from the wholesale rate base on which the Suburban Purchasers pay depreciation and return. The calculation of the amount by which the wholesale portion of the Water Enterprise rate base is to be reduced as of June 30, 2008 in order to reflect these capital grants is shown on Attachment C. 3. Impact of Correction to Rate Base Reflecting Grants on Suburban Revenue Requirement for FY 2007 -08. The Suburban Revenue Requirement includes depreciation and return 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 2007 -08, the SFPUC treated the amount of a grant for improvements to the Millbrae Administration Building (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. In calculating the Suburban Revenue Requirement for FY 2008 -09, the SFPUC changed the accounting method by which the Suburban Purchasers receive the benefit of capital grants. Rather than treating the adjustment as a credit to the Balancing Account, the new approach reduced the net book value of assets by the amount of grants received. In order to apply this approach consistently, the Balancing Account credit previously given in FY 2007 -08 of $461,670 must be reversed. December 20, 2010 Final 2 2630358.1