AgdaPkt 2016-06-13 Interview and Joint SA PFA

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7.A. - Page 53 2.9.4 Ongoing Cost Inflation The City's water utility faces ongoing operating cost inflation due to annual increases in a range of expenses including staffing, utilities, insurance, supplies, etc. On top of rate increases needed for other purposes, small annual rate increases are generally needed to keep revenues aligned with cost inflation and prevent rates from falling behind the cost of providing service. 2.10 Water Utility Financial Projections BWA developed long-term cash flow projections to determine the water utility's annual revenue requirements and project required water rate revenue increases. The financial projections incorporate the latest information available as well as a number of reasonable and slightly conservative assumptions developed with input from the City. Key assumptions include: WATER SALES & PURCHASES • Total water sales for 2015/16 are projected to come in 12% lower than in 2014/15 based on water sales during the first half of the fiscal year. Projected water sales account for estimates of new demand from growth coupled with a decrease in future water sales due to price elasticity (customer response to reduce water consumption in response to price increases). An economic study previously developed for BAWSCA indicates City water demand declines by approximately 1.7%for every 10% of rate increases. • Future wholesale water rates are based on the most-recent SFPUC rate projections from February 2016. SFPUC rates (with the BAWSCA bond surcharges that are collected with SFPUC's water rates) are projected to increase by approximately 37% over the next 4 years. REVENUE ASSUMPTIONS • Rate adjustments are assumed to become effective on August 1, 2016 and July 1 of each subsequent year. • Growth in single family equivalent connections is projected at little under 2.0% of the City's customer base in 2016/17 and 0.50% in 2017/18 as the City anticipates the addition of approximately 2,000 multi-family dwelling units plus some significant commercial development over the next 2 years. Subsequently, growth is projected at 50 single family equivalents per year, or about 0.12% of the City's customer base. • Water sales revenues are based on water sales projections and projected water rates. BWA developed separate tables to account for conservative water use projections by customer class and rate tier over the next three years. • Interest earnings are projected based on the annual beginning fund balance multiplied by projected interest rates that gradually increase from 0.5%to 2.0% over the next 5 years. B Water Utility Finances& Rates 26 �'ti Water&Sewer Financial Plans&Rate Studies