MWEA Lagoon Seminar

Presented by: Rich Grant, PE February 2013

Your Utility Uses Money as Fuel-

Financial Management,

Capital Planning, Need for

Inflation Adjustments

CONCEPTS

• User Charges

• ‘Depreciation’

• Inflation

• ‘Saving Money’

CAPITAL PLANNING

• 5-10 yr Plans & Cash Financing

• Subsidized Financing

INFLATION ADJUSTMENTS

Proposed Agenda

User Charges =

Reliable Source of Funding

‘Depreciation’ =

Inevitable wear & tear

Inflation =

Inevitable … reduction of

buying power

Inadequate (Low) User Charge

IS NOT Saving Money

Concepts

Capital Planning

Your User Charge needs are

unique.

It’s been a political hot topic to

compare rates … it’s not very

useful to your utility.

If your utility rates are lower than

needed, it’s not a “cost savings”

but a path to run the utility into the

$$ dirt.

Capital Planning

$-

$10,000,000

$20,000,000

$30,000,000

$40,000,000

$50,000,000

1970 1980 1990 2000 2010 2020 2030 2040 2050

Year

Funding Half Depreciation Funding No Depreciation Total Investment

System Value with Time

Legend:

Cash Balance

Facilities Condition

OK OK Disaster

“Cash

depletion”

“Facilities &

Depreciation”

Cash & Facilities

CAPITAL FUNDING OVERVIEW: Collection System

• Normal wear & tear, replacement

• Accelerated damage

(odor/corrosion effects)

• Correction of historic issues

• Infiltration/Inflow

• Overflows?

Treatment, Discharge, Reuse

• Normal wear & tear, replacement

• New permit requirements (e.g.

nitrogen, phosphorus)

• Correction of historic issues

Utility Capital Funding Needs

Reuse Older/excellent technologies

Lots more “miles” of treatment capability!

Successful WWTP Upgrade Strategies

Purchase Price + capital

improvements

“Depreciation” (wear & tear)

Asset life = _____ Years?

Maintenance

vs.

Replacement

Asset Capitalization

“Community Investment”

Take Ownership –

Sewer Enterprise Fund

How did it get to be so low?

Did someone try to “save money”?

Not Spending IS NOT An Option

Fuel it Up!

It’s About Dollars -

Convert 2ndry Trt to

Algae System

Increase Biogas

Energy Production

Location of New

2ndary Treatment

Location of New

Odor Control

Determine & Prioritize Needs

Your 5-10yr Plan is

used to justify the

most appropriate

Rates & Charges

… to keep the town’s

‘old truck’ running

TABLE 11

CITY OF

5-YEAR WWPF CAPITAL IMPROVEMENTS SUMMARY

Year Item Estimated Cost

1 Chemical Feed Evaluation & Improvements $11,000

RBC Loading Study & Flow Splitter Evaluation $3,000

Biosolids Decant Improvements Design & Construct $80,000

Lift Stn Generator Replacement $60,000

Biosolids Storage Improvements; Design $36,000

2 Secondary Clarifier; Rehabilitation $20,000

Life-Cycle Replacement Fund Evaluation $4,000

Biosolids Storage Improvements; Construct $414,000

3 Digester Improvements; Design & Construct $250,000

4 Digester Improvements; Construct $950,000

5 Digester Improvements; Construct $400,000

Flow Peaking Factor Study $4,000

Develop New 5-Year WWPF Plan $6,000

Total $2,238,000

5 yr Yearly Average $447,600

7 yr Yearly Average $319,700

Determine & Prioritize Needs

Currently known CIP

vs

“Surprises”

How do you Plan for the

Surprises?

Older Wastewater Utilities

UTILITY DEPRECIATION ESTIMATE (COMPARE TO 5YR PLAN) • Calculate Utility Value example

– WWTP $20 million

– Collection System $28 million

• Estimate Useful Life

– WWTP 35 years (dollar-wtd average)

– Collection System 75 years

• Calculate Depreciation Rate

– WWTP + Collection System $945,000/year

• Fund at Least Half of Estimated Depreciation

– Common Benchmark

– i.e. Run the Facilities Twice as Long as estimated

Capital Planning

Source: W.Mich Regional Planning Commission, Customer Communities, US Census Bureau

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1970 1980 1990 2000 2010 2020 2030

Po

pu

lati

on

Year

City of Township

Township2 Village

Paying Customers

City of

Village

Of † Township Township2

2004-2007 Avg. Daily Flow

(MGD) 0.25 0.07 0.11 0.06

20 Year Projected Annual

Increase 1.0% 0.0% 0.2% 5.0%

2028 Projected Avg. Daily

Flow (MGD) 0.30 0.07 0.12 0.16

2006 Service Capacity

Allocation (MGD) 0.72 0.25 0.16 0.15

*Estimated population based on respective trend projections.

†Assumes population experiences no change from 2000 to 2028

Billable WW Flow Projections

5-10yr Plans & Cash Financing

• Plan to Use Cash for everything possible!

• Develop 5-10yr Plans

• Adjust Rates & Charges

• Build the Sewer Fund to a level that will allow this

• Keep ‘Critical Low’ Balance

Subsidized Financing if the cash is gone

• SRF (2.5% interest rate)

• USDA (1.78% – 3.125% interest rate)

• Optimize grant components, each source

Capital Planning

Cash financing:

• Depreciation (~50%)

• Real Wear & Tear

• Repair & Replacement

No more Loans!?

Inflation!

$27.84

$32.10

$27.90$27.90$27.90$27.00$27.00

$36.85

$35.05

$33.23

$31.58

$30.14$28.67

$27.00

$20.00

$25.00

$30.00

$35.00

$40.00

2003 2004 2005 2006 2007 2008 2009Proposed

YEAR

SE

WE

R C

HA

RG

ES

Inflation (Dept. of Labor – Bureau of Labor Statistics; CPI)

Historical Rate Adjustments

Proposed

Gap

$4.75

Sewer Fund Consumed by Inflation

FY2010/11 User Charges:

$32.46/family/month @ 6,000 gal

(City resident)

Inflation Adjusted 2003/4*:

$41.08/family/month @ 6,000 gal

(City resident)

*Based on C.P.I.

We are suggesting:

1.Correct the current rates & charges

2.Tie the future rates & charges to a

well-established gage of inflation

Adjust Rates & Charges

Critical low balance = $______

Preferred balance = $______

Current balance ….

How did it get to be so low?

Plan to counteract these issues

Enough for the 5-10yr Plan?

What is the Condition of the Fund?

ABOVE CRITICAL LOW FUND BALANCE:

Cost of Service Basis

- Fund balance amount tied to identified

needs

- Enterprise Fund dedicated for this utility

Enough for:

- Major equipment replacement (specific

units)

- Emergency actions (foreseeable,

planned)

- Unplanned actions, contingencies

Build the Fund Balance

What’s next for Rates & Charges?

OR

Most Utility Charge Systems are out of date

The Utility Value and Reliability will be depleted without sufficient $

“Enough” User Charge developed by Cost-of-Service

specific to your town

Process of User Charge Adjustment need not kill the messenger

Process:

1. Develop 5-yr and 10-yr plans

2. Correct the current rates & charges

3. Tie future rates & charges to a well-established gage of inflation

Summary

Rich Grant, PE

800.494.5202

Discussion &

Comment