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The single largest operating cost for the water operation is the purchase of wholesale water from the City of St. Paul. For 2013, the budgeted amount has been increased given the rate increase imposed by St. Paul as well as the uncertainty of future wholesale water rates. The City of St. Paul is currently undertaking a Cost �� of Service study to determine what changes might be needed in their rate structure. The City expects to enter into discussions with the City of St. Paul early next year to review the cost sharing formula outlined in , the current contract. The City also expects to have moderate increases in personnel and supply-related costs, leading to an �, overall budget increase of ] 2.0%. The impact on the water rates will also be affected by these and other � factors. As noted previously on several occasions, the City's long-term capital financing program has been significantly underfunded for many years. The Water Fund has been reliant on internal borrowings from the Sanitary Sewer Fund to provide for capital needs during the past several years. The 20-Year CIP calls for an average capital replacement need of $1.1 million annually. In contrast, current water rates only provide $700,000 annually. � Based on a recommendation of the CIP Task Force, the City Council agreed in 2011 to adopt a base rate increase of approximately 60% to alleviate the funding gap. The increase was to be phased in over two years beginning in 2012. For 2013, the increase is expected to generate an additional $400,000 annually. The base rate would need to be indexed for future inflationary impacts. It is further recommended that the usage rate be increased by approximately 2.5% to offset the increase in water purchase and other operating costs. � Discussion on Water Conservation Rates In January, 2009 the City instituted a new water conservation-based rate structure designed to encourage water conservation in conjunction with the goals and strategies outlined in the City's Imagine Roseville 2025 initiative, as well as a new State Law that required water service providers to encourage water conservation. This law has since been amended and the City is no longer reguired to have conservation rates as long as they can demonstrate that aggregate water use has declined due to other measures. The City created a 2-tiered rate structure that was designed to target excessive water usage as opposed to � the water used for everyday household needs. It is not unusual to see a 4 or 5 person household use 30,000 gallons or more per quarter for general use such as personal hygiene, washing clothes and dishes, cooking, etc. This is evidenced by evaluating a household's wintertime usage. In recognition of this, the rate structure was designed to encourage conservation without unduly penalizing larger households for `normal' � � water use. The current water rate structure is as follows: 2012 Usage Cate or Rate SF Residential; Up to 30,000 gals./qtr $ 2.15 SF Residential; Over 30,000 als./ tr — winter rate * 2.40 SF Residential; Over 30,000 gals./ tr — summer rate ** 2.65 Non-SF Residential — winter rate 2.80 Non-SF Rcsidential — summer rate ** $ 3.10 Page2of12