Summary of Cost Allocation Options

Exhibit 8-3 summarizes cost allocation options potentially of value in a variety of situations. It does not prescribe specific solutions, but provides a basis for the involved parties to evaluate potential options. The first section of Exhibit 8-3 addresses the allocation of costs related to potential upgrades or rehabilitation projects related to existing emergency interconnection facilities, and the second section addresses new facilities associated with the WSIRRA.

In conclusion, the representatives of local and state governments have many options, and the widely varying

circumstances of each situation suggest that costs will need to be recovered in more than one way. Some of the key points to be considered include:

• The costs of new facilities can be allocated using a variety of measures; these measures can be categorized as reflecting the need of each system for the improvements in question or the ability of the system to pay for the needed improvements.

• The relative need of each QWS as reflected by the Critical Scenario Deficits estimated as part of this study may represent the most equitable single approach for cost allocation.

• Combinations of approaches could be utilized, particularly if some portion of the improvements in question were determined to provide regional benefit.

Exhibit 8-4 reflects a simplified decision tool demonstrating a series of steps that could be used in evaluating the allocation of costs among QWSs for interconnection projects in the future. The decision tree can be easily modified to incorporate additional allocation or cost factors. Total costs are first segmented into those related to existing facilities (generally, operating, maintenance, and repair costs (OMR)), and those related to new facilities (capital costs as well as OMR). An allowance is then made for potential third party support of major projects to indicate that financial support of particular projects by state or other agencies would be removed prior to the allocation of costs among the participating QWSs. This allowance for third party financial support merely acknowledges the potential for partial funding of projects deemed to serve a particularly important interest beyond that of the QWSs involved. The net costs of a project can then be allocated as a function of projected

8.0—MODEL AGREEMENTS AND SUMMARY OF INNOVATIVE FINANCING BEST PRACTICES

water supply deficits or some other measure or mix of measures. The magnitude of the cost burden to each QWS could be estimated, and an example evaluation metric of $1.00 per customer per month is shown to illustrate one potential view of the possible benefit of alternative funding mechanisms for especially large projects.

8.0—MODEL AGREEMENTS AND SUMMARY OF INNOVATIVE FINANCING BEST PRACTICES

EXHIBIT 8-3

Cost Allocation Options

Type of Costs Potential Allocation Approach Relative Advantages Relative Disadvantages Comments

Costs of producing / providing water from existing emergency interconnection facilities

Volume of water used through the connection Usage is often seen as being related to costs;

volumetric cost allocations are common Interconnection usage is not always metered; capacity costs are not always well recovered through volumetric charges; use of an interconnection for peaking purposes can be particularly troublesome if volumetric charges are not well crafted

Not likely to be the best option in cases except where the interconnection is a primary source of supply for one QWS and an existing agreement is in place Potential capacity use as measured by

connection / meter size Capacity is clearly related to the costs of providing water for emergency usage Capacity may not reflect burden of actual usage patterns as some interconnections are used for more than emergency water; cost- based capacity allocations may be significantly higher than many utilities are accustomed to paying for emergency capacity

Not likely to be the best option if any periodic use is associated with the interconnection

New cost-based combination of capacity and volumetric charges

Provides equitable means of recovering costs of providing capacity as well as costs of water production

Negotiation, calculation, and implementation costs of transition to new system

New, cost-based rate structures following cost-of- service principles as outlined in Principles of Water

Rates, Fees, and Charges published by AWWA help to achieve equity in cost recovery, but transaction and implementation costs may be high

Any method currently used by the parties Already accepted and in use; transaction /

negotiation costs are minimized May not fit a common standard for cost allocations May be the best option for recovery of costs from existing facilities in most cases Incremental costs of new facilities

associated with WSIRRA Volume of water used through the interconnection Usage is often seen as being related to costs; volumetric cost allocations are common Interconnection usage is not always metered; capacity costs are not always well recovered through volumetric charges; use of an interconnection for peaking purposes can be particularly troublesome if volumetric charges are not well crafted; may not reflect cost drivers for WSIRRA improvements

Not likely to be the best option in many cases

Potential capacity use as measured by interconnection / meter size

Capacity is clearly related to the costs of providing water for emergency usage

Capacity may not reflect burden of actual usage patterns as some interconnections are used for more than emergency water; cost- based capacity allocations may be significantly higher than many utilities are accustomed to paying for emergency capacity; may not reflect drivers for WSIRRA improvements

Not likely to be the best option if any periodic use is associated with the interconnection

New cost-based combination of capacity and volumetric charges

Provides equitable means of recovering costs of providing capacity as well as costs of water production

Negotiation, calculation, and implementation costs of transition to new system

New, cost-based rate structures following cost-of- service principles as outlined in Principles of Water

Rates, Fees, and Charges published by AWWA help to

achieve equity in cost recovery; cost-based rate structures may be especially appropriate in cases of significant new investment

Any method currently used by the parties Already accepted and in use; transaction / negotiation costs are minimized

Current cost allocation methods did not anticipate WSIRRA improvements and likely would not equitably allocate these costs

Not likely to be the best option in cases except where new WSIRRA-related investment is de minimis Population served by the QWS May reflect system size; could be said to reflect

system need in some cases; could reflect system funding ability in some cases

Does not account for non-residential usage; does not reflect capacity or volumetric utilization of the interconnection; potentially seen as punishing prepared systems; does not reflect cost drivers for WSIRRA improvements

Subject to the stated disadvantages, population served by the QWS could be a potential method of allocation for a portion of the costs of regional interconnection projects if such projects were determined to be of region-wide benefit

Population served by the interconnection May reflect capacity associated with the

interconnection; could reflect need associated with the interconnection; could reflect system funding ability in some cases

Does not account for non-residential usage; does not reflect capacity or volumetric utilization; potentially seen as punishing prepared QWSs; does not reflect cost drivers for WSIRRA improvements

8.0—MODEL AGREEMENTS AND SUMMARY OF INNOVATIVE FINANCING BEST PRACTICES

EXHIBIT 8-3

Cost Allocation Options

Type of Costs Potential Allocation Approach Relative Advantages Relative Disadvantages Comments

Incremental costs of new facilities associated with WSIRRA

(Continued)

Total number of customers May reflect system size; could be said to reflect system need in some cases; could reflect system funding ability in some cases

Does not reflect capacity or volumetric utilization of

interconnection; potentially seen as punishing prepared QWSs; does not reflect cost drivers for WSIRRA improvements

Subject to the stated disadvantages, total number of customers could be a potential method of allocation for a portion of the costs of regional interconnection projects if such projects were determined to be of region-wide benefit

Total annual system usage Reflects system size; captures non-residential usage; could be said to reflect system need in some cases; could reflect system funding ability in some cases

Does not reflect capacity or volumetric utilization of

interconnection; potentially seen as punishing prepared QWSs; does not reflect drivers for WSIRRA improvements

Subject to the stated disadvantages, total annual QWS usage could be a potential method of allocation for a portion of the costs of regional interconnection projects if such projects were determined to be of region-wide benefit

Maximum monthly usage Reflects system size; reflects seasonal demands;

could be said to reflect system need in some cases Does not reflect capacity or volumetric utilization of interconnection; potentially seen as punishing prepared QWSs; does not reflect drivers for WSIRRA improvements

Not likely to be the best option in many cases

Relative estimated critical supply deficits Reflects relative need as estimated in this study; could be adjusted to reflect multiple points of connection if appropriate

May result in allocation of costs that is beyond the ability of some

QWSs to bear without significant revenue enhancement Likely the best single option for allocation of these costs in many cases Relative ratios of critical deficits to Long

Range Reliability Targets

Reflects relative need as estimated in this study; could be seen as recognizing planning and

investment by comparatively prepared QWSs; could be adjusted to reflect multiple points of

interconnection if appropriate

May result in allocation of costs that is beyond the ability of some QWSs to bear without significant revenue enhancement; does not reflect drivers for WSIRRA improvements

Potentially of use in combination with other allocation approaches

Annual revenues Reflects system size and financial capacity; could minimize cost burden on smaller, less financially strong QWSs

Does not reflect capacity or volumetric utilization of

interconnection; potentially seen as punishing prepared QWSs; does not reflect drivers for WSIRRA improvements

Not likely to be the best option in many cases

Cash balances Reflects system size and financial capacity; could minimize cost burden on smaller, less financially strong QWSs

Does not reflect capacity or volumetric utilization of

interconnection; potentially seen as punishing prepared QWSs; does not reflect drivers for WSIRRA improvements

Not likely to be the best option in many cases

Credit rating Reflects system size and financial capacity; could

minimize cost burden on smaller, less financially strong QWSs

Does not reflect capacity or volumetric utilization of

interconnection; potentially seen as punishing prepared QWSs; does not reflect drivers for WSIRRA improvements

Not likely to be the best option in many cases

Any form of regional allocation beyond the

specific QWSs in question Could reflect a region-wide benefit of increasing interconnectedness among QWSs Does not reflect capacity or volumetric utilization of interconnection; potentially seen as punishing prepared QWSs; does not reflect drivers for WSIRRA improvements; may require legislative or other authority to impose costs on QWSs not participating in specific improvements

May be worth considering for a portion of costs,

perhaps administrative and program management costs if a larger program than is currently envisioned were to be adopted

8.0—MODEL AGREEMENTS AND SUMMARY OF INNOVATIVE FINANCING BEST PRACTICES

EXHIBIT 8-4