HomeMy WebLinkAboutBozeman Utility Rate Consulting and Financial Analysis_AE2SCITY OF BOZEMAN
PROPOSAL FOR UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS
www.ae2sNexus.comTHE FINANCIAL LINK
8/24/2023
AE2S Nexus
1288 North 14th Avenue, Suite 103
Bozeman, MT 59715
406-219-2633
Point-of-Contact/Project Manager: Miranda Kleven, PE
Miranda.Kleven@ae2s.com
T: 701-746-8087
C: 701-740-3388
The Financial Link
1288 North 14th Avenue; Bozeman, MT 597151 Phone: 406-219-2633 www.AE2SNexus.com
The Financial Link
August 24, 2023
Melissa Hodnett, MBA
C/O Mike Maas, City Clerk
City of Bozeman, MT
agenda@bozeman.net
Re: Dedicated Utility Rate Consulting for the City of Bozeman’s Water, Wastewater, and Stormwater Utilities
Dear Ms. Hodnett:
We see and appreciate the City of Bozeman’s proactive approach in the operation of its water, wastewater and stormwater utilities, as
evidenced by your use of effective rate-setting tools founded on sound industry-standard methodology. AE2S Nexus has been pleased to
support implementation of these practices for the last five years, and we are excited to continue as your utility financial planning
resource. Continuing to work collaboratively with AE2S Nexus for this study will offer the following specific benefits:
✓ Our Past Experience = Stronger Understanding of Bozeman-Specific Priorities. AE2S has spent the last decade assisting
the City in addressing water challenges attributable to factors such as growth and climate fluctuations. We’ve engaged in policy
discussions with staff and the Commission on topics such as conservation rates, drought rates and reserves, cost of service rate-
setting, and overall reserve strategies. Our team is well-versed in issues impacting water, wastewater, and stormwater utilities
throughout Montana and across the region and is committed to supporting the City of Bozeman as your dependable, responsive
utility financial planning team.
✓ Knowledge of Broad Water Challenges in the Region Provides Bozeman with Seamless Extension of Staff. Our team is
uniquely qualified to efficiently support your financial goals for your utilities. Our recent work supporting Bozeman policy and
rate-setting efforts, and involvement of our team members in evaluating the feasibility of regional water and wastewater service for
the Gallatin Valley, affords AE2S Nexus the background necessary to efficiently and effectively provide rate and financial planning
consultation.
✓ Relevant Financial Solutions that Match the Time and Circumstances. Five years is a long time. What makes sense for Bozeman,
your user base, and your utility operations today may not make sense in the future. This might seem like an odd statement. Rest
assured - our knowledge of your existing rates and the water supply and wastewater challenges facing the region, along with the
decades of experience across the region means that our flexible and dynamic team is well-suited to provide customized rate advice
and financial planning support to the City of Bozeman well into the future.
On behalf of our project team, thank you for this opportunity. We are truly excited to continue our working relationship with you
providing expert rate and utility financial consultation for the coming five years. Please contact me with any questions or clarifications
that may be required with our proposal. I can be reached on my cell at 701-740-3388 or by email at Miranda.Kleven@ae2s.com.
In the Spirit of Service,
AE2S Nexus
Miranda Kleven, PE Jordan Grasser, PE
Project Manager Operations Manager
INSIDE
1 | Project Description and Approach...............................................................
2 | Project Team........................................................................................................
3 | Related Experience............................................................................................
4 | Cost Proposal......................................................................................................
5 | Affirmation of Nondiscrimination....................................................................
A | Resumes................................................................................................................
B | Additional Resources: Sample White Paper..............................................
1.1
2.1
3.1
4.1
5.1
A.1
B.1
AE2S BOZEMAN UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS PROPOSAL 1.1
PROJECT DESCRIPTION AND APPROACH | 1
during the project phase, depending
on the assignment and collective
desire of City and project team
• Progress meetings as required - varies
by task (e.g. combined cost of service
and revenue adequacy model update
typically entails three (3) progress
meetings)
• Attendance and presentations at City
Commission meetings, as requested
by staff
The kick-off meeting will also include
a discussion of a timeline for project
milestones.
Throughout the five-year service
timeline, AE2S Nexus will be focused on
frequent and succinct collaboration. In
addition to the kick-off meeting, we will
engage in the following activities:
• Ongoing project management
(to keep us on task and keep you
informed)
• Weekly or bi-weekly progress reports
1 | PROJECT DESCRIPTION AND APPROACH
SCOPE OF WORK
REVENUE ADEQUACY MODEL UPDATES (20-Year Projections)
• Water
• Wastewater
• Stormwater
• Incorporate Benchmarking Components
COST OF SERVICE ANALYSIS
• Water
• Wastewater
• Stormwater ( if requested)
RATE STRUCTURE EVALUATION
• Appropriateness of Existing Rates and Fees
• Adherence to Policy
• Regional Comparisons - Structures and Charges
-Water
-Wastewater
-Stormwater
RATE DESIGN
• Cost of Service-Based Rate Alternatives - Water and Wastewater
• Revisit/Update Basis for Conservation Rates
• Low Income Rates
• Adherence to Policy
• Revenue Sensitivity to Rate Alternatives
• Aid to Construction/Impact Fee Incorporation
IMPLEMENTATION
• Reserves - Revisit Approach for Adherence to Policy
-Operating
-Renewal/Replacement
-Conservation
• Model Rate Alternatives in Revenue Adequacy Models
• Evaluate Water Consumption and Revenue Elasticity
Using Probabilistic Revenue Forecasting Model
-Translate to Impact by Utility
• Evaluate Impacts of Capital/Master Planning Support
-Capital Phasing
-Future Water Supply Expansion
-Potential Regional Projects
OTHER ONGOING CONSULTATION
• Rate Model Training/Support
• Model Scenarios as Requested
• Annual Rate Evaluation Support and/or QA/QC as Requested
• Financial Planning Consultation as Requested
• Detailed Water Conservation Analysis as Required
• Drought Rate and Reserve Analyses as Required
Upon selection, AE2S Nexus will
schedule a kick-off meeting via video
conference at your earliest convenience.
We will use this meeting to review overall
objectives, clarify any updates to system
operations and/or changes in user classes,
and discuss the information required to
complete the analyses. It is important
to all of us that the project proceed
efficiently, and that project deliverables
are provided on or before the deadlines.
Proven Approach for Bozeman Supported by a Dependable Team
We understand that Bozeman is facing
conditions that pose both opportunity and
challenges for the community. Growth
and climate-related impacts in the region
have required Bozeman to be ahead of the
curve in terms of drought and water-supply
planning. Our team has worked with you
on these efforts and is working with other
communities with similar conditions.
Our approach to supporting your
objectives for financial analysis and rate-
setting is similar to that used in many other
communities, but is very much focused on
the specific needs of the City of Bozeman.
We have been involved in policy and
rate-setting discussions in the past and are
committing some of our most experienced
staff to support Bozeman as you work
through your ongoing financial service
needs for your utilities. An outline and
description of the proposed scope of work
is shown below.
Based on our review of the RFP, we understand the key areas of study for which the City seeks recommendations include:
1 5
6
2
3
4
Our Team has experience with your existing models, rate structures and reserve strategies. We are ready to deliver defensible cost of service-based rates by the end of 2023.
AE2S BOZEMAN UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS PROPOSAL 1.2
PROJECT DESCRIPTION AND APPROACH | 1
Example Benchmarking for the City of West Fargo
Example Dashboard to Visualize Utility Health
UTILITY BENCHMARKING DATA READY FOR USE
AE2S Nexus is very serious about our
reputation as rate experts in the region.
Our annual rate survey has afforded us a
front row seat to rate practices and trends
in the region for the past 22 years. We
will put that knowledge to work to benefit
the City Bozeman by providing analysis
and guidance on rate-setting alternatives
based on usage characteristics within
your system and successful/unsuccessful
examples from your peers throughout the
region.
By collecting data and building
relationships around the region, we
REVENUE ADEQUACY MODEL UPDATES
As the City looks toward financial
management of its utilities for the next
five years, the first order of business is to
deliver updated (Excel-based) rate models
reflective of the City’s current organization
of expenses, rates and user characteristics
by user class. As requested, the models
will be set up to project through a 20-year
planning period, enabling you to both
monitor how near-term decisions impact
your future financial position, as well as how
long-term challenges can be mitigated by
near-term actions. The updated models will
be designed with the flexibility to evaluate
multiple funding and rate options based
on changing capital expense, funding and
phasing scenarios. Our team has worked
extensively with the existing water and
wastewater models and will apply feedback
from your staff, as well as model attributes
developed for similar clients, to deliver
water, wastewater, and stormwater models
ready for scenario evaluation by the end of
2023.
We think of these models as your
financial plan. Once set up, components
of all other financial considerations are
captured and play a role in projecting the
future financial outlook:
• Operation and Maintenance (O&M)
Projections
• Rate Structures
• Cost of Service-Based Rate
Modifications
• Projected Account Growth
• Project Consumption Impacts from
Growth, Pricing, and Non-Pricing
Conservation Efforts
• Reserve Targets and Funding Strategies
• Planned Capital Improvements
• Planned/Unplanned Asset Renewal/
Replacement
• Existing and Future Debt Management
These customized tools will be utilized
throughout the planning period to help
you evaluate and communicate short- and
long-term impacts of decisions related to
operational, capital investment/renewal,
funding, and rate-setting strategies for the
utilities.
have developed a broad database from
which to draw benchmarking data
related to a variety of operational and
financial metrics. We want to utilize that
information to help you understand your
financial health as compared to your peers.
This information can provide valuable
support as you deliver your updated
financial plan to your decision makers and
the public.
AE2S BOZEMAN UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS PROPOSAL 1.3
PROJECT DESCRIPTION AND APPROACH | 1
COST OF SERVICE ANALYSIS
Cost of Service Analysis (COSA) is
critical to ensuring the rates and charges
for service are commensurate with the
benefits received. Said more simply, a
COSA is performed to ensure that those
causing the costs are paying for the costs.
The results of the COSA will tell us a
couple of things: 1) whether the existing
rate structures are fairly collecting revenue
from each user class, and 2) whether the
components of the rate structures are
RATE STRUCTURE EVALUATION
Our team has worked with Bozeman
before to evaluate the cost of service
associated with water and wastewater
service. Additionally, we have worked
with communities across Montana to set
fair and equitable cost of service-based
rates that are also meeting the legal
generating the correct revenue based on
how different types of cost are driven
(fixed, variable, etc.). This information
will help the team conclude whether
specific user classes are being charged
requirements for rate-setting codified in
Montana State Law. As we continue to
advise you on your utility rate-setting
approaches, we will continue to follow
industry-standard practices while ensuring
adherence to City policy and State Law.
appropriately, and whether rate-related
policy objectives are being met. In
addition, comparisons will be made to the
fee structures and bills for utilities in the
region.
FUNCTIONALIZATION
Functionalize Budget into
Primary Categories of
Service
CLASSIFICATION
Classify Costs of Primary
Budget Categories Based
on Causative Elements
ALLOCATION
Allocate Costs to SpecificUser Classes
• Meter
• Customer
• S/T - Fixed
• S/T - Variable
• Transmission
• Residential
• Apartment
• Commercial
• Industrial
• WTP
• Meter
• Customer
• Commodity
• Capacity
• Fire Protection
• Distribution
• Storage
• Assigned Hydrant
• Hydrants• Private Fire Protection
• Assigned Hydrant
COST OF SERVICE METHODOLOGY - WATER UTILITY ILLUSTRATION
$0.00
Missoula, MT $59.04
Water
Wastewater
Stormwater
Stormwater Fees Collected
with Property Taxes^
$59.82
$72.11
$75.56
$77.51
$79.76
$87.55
$89.86
$91.46
$99.63
$101.60
$116.14
MONTANA
Great Falls, MT
Butte, MT^
Billings, MT^
Belgrade, MT
Miles City, MT
Havre, MT
Evergreen W&SD , MT
Bozeman , MT
Sidney , MT
Kalispell , MT^
Whitefish , MT
$40.00 $80.00 $120.00 $160.00 $200.00
AE2S BOZEMAN UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS PROPOSAL 1.4
PROJECT DESCRIPTION AND APPROACH | 1
By utilizing results of the COSA for
water and wastewater, our project team
will provide unit fixed and variable cost
comparisons to which we can reference
and frame a discussion regarding the
desired level of revenue to obtain from
fixed versus variable charges. This
effort will take into consideration the
benefit of revenue stability associated
with maximizing the fixed charges while
balancing concerns such as affordability
and political acceptance by evaluating the
impact of potential changes to a cross-
section of users.
The impacts of any potential rate
structure changes will be a consideration
in developing potential user class-specific
Escalation factors will be developed
to provide a basis for the 20-year pro-
forma of O&M expenses and future
project financing considerations. These
escalation factors will be adjusted based on
historic budget increases for the utilities
as a whole, as well as specific line items. In
addition to revenue requirements, revenue
projections for utility rate revenues and
impact fees will be developed. Budgeted
and forecasted revenue sources will be
incorporated into the revenue adequacy
model and escalated, as appropriate, based
RATE DESIGN
water and wastewater rate options for the
City’s consideration, if appropriate.
In addition to user rates and
charges, the water Drought Rates and
basis, Drought Reserve and Drought
Surcharge Rates and associated
assumptions will be reviewed for
consistency with current policy and
appropriateness given current and
projected conditions.
As part of the initial kick-off meeting,
the AE2S Nexus project team will discuss
performance of the existing stormwater
fee structure. For stormwater rate design
efforts, AE2S Nexus will compare and
contrast several fee structures utilized
throughout the region, if desired. Fee
on system growth assumptions and water
rate design and impact fee strategies.
An important aspect of the revenue
adequacy models will be the review of
existing reserve policies and funding
targets. The project team will review
existing policy guidelines and evaluate
the suitability and effectiveness relative to
overall utility needs for the next 20 years.
Potential modifications of any existing
reserve policies or establishment of any
additional policy will be evaluated and
presented in terms of impact and benefit
structure alternatives will include
considerations for residential billing,
development of minimum charges, and
specific parcel-based methods for billing
non-residential properties.
For each of the identified fee
structures, AE2S Nexus will select at
least three (3) representative customers
to demonstrate the impact of alternative
fee structures. The customers selected
will include a cross-section of the user
base. This sensitivity analysis will include
rate data from other water, wastewater,
and stormwater utilities in the region as
obtained through the AE2S Nexus Annual
Utility Rate Survey.
to the utility.
The financial plans will outlay final
rate recommendations and compile the
revenue requirements and reserve targets.
The end result will be a dynamic revenue
adequacy model for each utility that will
compare projected revenue requirements
against projected revenues to determine
revenue sufficiency and include
recommended future rate adjustments.
In addition to building out your water
rate models, AE2S Nexus proposes using
a probabilistic revenue forecasting model
To pull the entire study together,
all elements will be pulled into the
rate models to project rate revenue
requirements for the short- and
long-term planning period – a
Revenue Adequacy Analysis. Revenue
Adequacy is a process in which
projected revenue requirements are
modeled against projected revenues
to determine revenue sufficiency for
the planning horizon. The Revenue
Adequacy evaluation will use revenue
and expense projections to ensure
sufficient revenue is generated to:
Include adequate coverage for operations and maintenance, reinvest in utility capital projects, fully fund program activities
Provide revenue stability
Track ongoing cash balances
Establish cash reserve needs and target reserves
Monitor debt service coverage requirements to ensure loan covenants are met
IMPLEMENTATION
AE2S BOZEMAN UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS PROPOSAL 1.5
PROJECT DESCRIPTION AND APPROACH | 1
(similar to results shown below) to help
you better understand how changes to
rates and rate structures can affect overall
water usage within your system. By
utilizing the revenue forecasting model,
we can help you understand how your rate
structure will perform under conditions of
above-average rainfall, when consumption
typically declines. This information,
coupled with updated analysis of your
drought rate configuration, can help
you prepare for impacts to both water
and wastewater revenues under extreme
weather conditions.
Capital needs have the greatest
impact on projected revenue needs for
a utility. Our project team has decades
of experience working with utilities to
complete scenario analyses associated
with various capital funding and phasing
strategies. As noted in the RFP, the City
intends to complete master planning
activities within the five-year timeframe of
service. Our project team will be on call
to support your master planning efforts
as you work through important planning
exercises to promote sustainability of your
water, wastewater, and stormwater utilities.
The AE2S Nexus team is committed
to supporting the City of Bozeman utility
management teams as you work through
budget and rate-setting processes for the
next five years. We are available to provide
rate model training, QA/QC on model
updates or runs performed by city staff,
and other utility financial management
issues as they arise. We are also available
to be onsite to present to/work directly
with your City Commission as you discuss
policy and financial management issues
moving forward.
Our staff has broad experience
evaluating capital renewal/replacement
needs and developing rates designed for
full cost recovery in support of capital
OF SPECIAL INTEREST: ONGOING SUPPORT
renewal/replacement initiatives (White
Paper authored by AE2S Nexus team
members is included as an appendix to
this proposal). With that background,
we are exceptionally prepared to support
your on-going capital and master planning
efforts.
For the City of Bozeman, it could be
said that nothing is routine when it comes
to managing the physical and financial
sustainability of the water, wastewater,
and stormwater utilities. Unprecedented
growth coupled with challenging weather
fluctuations and water resource constraints
have necessitated a mindset that is
forward-thinking, nimble, and creative.
The City has prepared itself for managing
drought impacts by adopting drought rates
tied to its drought response, a drought
reserve to mitigate the financial impact of
drought, is actively engaged in long-range
capital and master planning for its utilities
and is exploring potential collaboration
with partners in the Gallatin Valley to
address water supply and wastewater
disposal alternatives. There is a lot going
on, and our team members have been
supporting the City through many of
these efforts for the past 10 years. We are
ready to continue providing that support
as you continue to address the changing
conditions of your on-going challenges.
The graph to the left
shows the amount
of revenue that
would be captured
under various
scenarios, up to
100% of target.
ANNUAL SERVICE CHARGE AND SALES REVENUE SIMULATION DISTRIBUTIONS
AE2S BOZEMAN UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS PROPOSAL 2.1
PROJECT TEAM | 2
Our project team will be anchored
by those that have learned your rates over
the last five years and know your system.
Miranda Kleven will be the primary
point of contact and will lead the project
team. Scott Buecker will serve as the
Principal-in-Charge, putting company-
wide resources at our disposal for your
project. In addition to the core project
team, we will draw on our pool of analysts
to provide updated cost of service and
revenue adequacy models. Our talented
team includes analysts specifically focused
on effectively and efficiently creating/
updating reliable rate models to meet your
specific needs. We value our time and
our work with the City of Bozeman. As
a result, we have set aside time over the
remainder of the year specifically devoted
to preparing refreshed models ready for
Capital Improvement Plan updates by the
end of calendar year 2023.
2 | PROJECT TEAM
CITY OF BOZEMAN
MIRANDA KLEVEN, PE
Project Manager
JACOB STROMBECK, PE
Technical Support
KAYLA MEHRENS
Stormwater Lead
RYAN GRAF, MPA
QA/QC
DYLAN WALSKI
Wastewater Lead
SCOTT BUECKER, PE
Principal-in-Charge
NIKKI JACOBI
Water Lead
POOL OF 330+ ADDITIONAL STAFF
TEAM ORGANIZATION AND ROLE DESCRIPTIONS
PROJECT MANAGER
A Deep Bench Provides Dynamic and
Flexible Team to Address Ongoing
Financial Consultation Needs
Miranda Kleven, PE
Ms. Kleven has over 22 years of experience in providing support to utilities in cost of
service-based rate-setting, budgetary, reserve, and capital planning efforts designed
to promote financial health and sustainability. Miranda has collected data for and
coordinated the production of the AE2S Annual Rate Survey for 19 years, and with
that has broad knowledge of regional rate-setting practices and approaches. Her work
with the rate survey has also included the collection and evaluation of operational and
financial benchmarking statistics for municipal water and wastewater systems as well as
and rural systems throughout the region.
Over the course of her career, she has managed, been the technical lead, or provided
QA/QC on virtually every one of AE2S Nexus’ municipal rate study and impact fee
projects, including the following which are similar in size and scope to your project:
• Water and Wastewater Rate Study, Billings, MT
• Water and Wastewater Rate Study, Bozeman, MT
• Water System Planning and Regional System Participation Support, Sioux Falls, SD
• Water, Sewer, and Storm Drainage Utility Rate Design Study, Eden Prairie, MN
• Water Utility Rate Study, Maple Grove, MN
Recognizing the importance of providing well rounded financial advice, key members of
the team, including Miranda, are Series 50 certified municipal advisor representatives.
RESPONSIBILITIES
Overall execution and delivery of the project
Direct the resources needed to ensure that you get the highest quality delivery, meeting your unique challenges, on your timeline
AVAILABILITY
Miranda is committed
to seeing this project through and has committed availability to your project over the next five years
AE2S Nexus was established because
we know the heart of long-term
utility success rests on the strength
of financial planning. The City
of Bozeman will be supported by
financial analysts and engineers
that have dedicated their entire
careers to municipal utility financial
services. Our assembled project
team has collaborated on hundreds
of financial planning efforts, and can
quickly respond to changing needs,
and will help you work through your
planning process.
AE2S BOZEMAN UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS PROPOSAL 2.2
PROJECT TEAM | 2
SCOTT BUECKER, PE - Principal-in-Charge
Scott brings strong oversight to the team having 23 years of experience in the water, wastewater treatment, and conveyance industries. He will utilize his expertise to formulate a balanced and transparent rate structure that ensures financial sustainability while equitably distributing costs among users.
NIKKI JACOBI - Water Lead
Nikki has completed numerous rate studies for both municipalities and water districts. Her wide range of experience will offer new perspectives and creative alternatives to achieve your water system goals.
Primary Responsibilities:
• Kick-off Meeting
• Regional Rate and Fee Comparisons
• Implementation
Primary Responsibilities:
• Kick-off Meeting
• Water Capital and Rate Analyses
• Regional Rate and Fee Comparisons - Water
• Implementation - Water
RYAN GRAF, MPA - QA/QC
Ryan works closely with municipalities across the region to develop the specialized tools that solve their utility rate planning challenges. He will bring this experience to help you develop and implement the right solutions.
DYLAN WALSKI - Wastewater Lead
Dylan has extensive experience organizing data, verifying assumptions, and establishing a reliable cost basis for the end rate product. He will apply his experience with customized rate modeling to develop a financial model that captures the cost of service and revenue adequacy results.
Primary Responsibilities:
• Kick-off Meeting
• Montana Funding Resource
• Technical Resource - Water and Wastewater
• Implementation Resource
• Overall Quality Assurance/Quality Control
Primary Responsibilities:
• Kick-off Meeting
• Wastewater Capital and Rate Analyses
• Regional Rate and Fee Comparisons -
Wastewater
• Implementation - Wastewater
JACOB STROMBECK, PE - Technical Support
Jacob leads our financial solutions team and brings a strong combination of engineering and financial expertise. He is talented at pulling together a variety of technical elements into effective solutions to achieve financial sustainability.
KAYLA MEHRENS - Stormwater Lead
Prior to joining AE2S, Kayla spent a decade working for
the City of Bozeman, where she developed and led their
stormwater utility. Through her combined public and
private experience, she is able to see the world through
your lens, allowing her to develop realistic and effective
solutions to meet your challenges.
Primary Responsibilities:
• Capital Planning Resource
• Technical Resource - Stormwater Rates and Charges
• Implementation Resource
Primary Responsibilities:
• Kick-off Meeting
• Stormwater Capital and Rate Analyses
• Regional Rate and Fee Comparisons - Stormwater
• Implementation - Stormwater
As the Principal-in-Charge and local presence, Scott will lead the interactions between City staff and the project team.
This will help to ensure clear and efficient communication with a local point person.
WORKING WITH CITY STAFF
Appendix A: Resumes, contains resumes of the key professional personnel comprising your project team. These resumes represent only a portion of the relevant experience for each individual.
AE2S BOZEMAN UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS PROPOSAL 3.1
RELATED EXPERIENCE | 33 | RELATED EXPERIENCE
WATER AND WASTEWATER RATE STUDIESBillings, Montana
The City of Billings, Montana, provides water and wastewater service
to its nearly 29,000 customers, supporting a thriving population of
over 117,000. In addition, the City provides treated water to the
Water District of Billings Heights, and wholesale wastewater service
to the Lockwood Sanitary Sewer District, the Phillips 66 Refinery,
and the Exxon Mobil Refinery. In early 2014, the City of Billings
retained AE2S Nexus to update its existing water and wastewater
rate models and recommend rates for the 2015 fiscal year (FY15).
As part of this update process, AE2S was asked to calculate a System
Development Fee (SDF) for a large industrial user connecting to the
wastewater system.
Since the completion of our first study for the City in 2015, the
City has retained our services on three additional occasions
for subsequent study updates, including the development of
recommended rates for FY16/FY17, FY18/FY19, and FY20/
FY21. Each update has involved a detailed review of the system
and assumptions associated with how costs are incurred within
KEY PROJECT ELEMENTS• Water and Wastewater Rate Updates
• Rate Structure Analysis
• Industrial and Wholesale User COSA
• System Development (Impact) Fee Design
• Revenue Forecasting and Rate Modeling
• Communication and Education Campaign
the system and which users are driving the costs. As each study
update has been comprehensive in nature, AE2S Nexus has provided
detailed review and recommendations over time for all retail and
wholesale user classes, including the residential, commercial,
irrigation, multi-family, and industrial classes of service.
A second aspect of the current studies has been the evaluation and
update of the City’s SDF models. Montana law directs that SDF
models are reviewed and updated on a regular basis to ensure that
costs are attributed fairly and accurately to new users connecting to
the system. AE2S Nexus updated the City’s SDF models to verify
that the City is appropriately and fairly charging new users based on
the most recent capital projections. The result of this portion of the
study was updated SDF rate schedules and a comprehensive report
consistent with Montana statutory requirements.
Communicating the reasons for changes in water rates and educating
the public on the importance of water were critical for the Billings
Rate Study.
Messages and tools developed for the City prioritized educating
residents on how water rates were determined, the true cost of water
delivery and usage, what was included on their utility bill, and the
importance of water conservation for long-term benefits. Messages
were distributed through multiple media. Talking points were
developed for the City leadership, and press releases were issued
to gain trust and transparency with the media. Combined with
the social media campaign, the public had avenues to connect with
public utility staff. An animated video was also created to explain the
utility bill in an easy-to-comprehend format.
DATE2014 - Present
CLIENTCity of Billings
CLIENT CONTACTJennifer Duray Deputy Director of Public Works 406-657-8239
USER CLASSREVENUE USER CLASSCOST
Rates:The City of Billings sets its water and wastewater rat
e
s
b
y
Resolution. The rates generally include a fixed monthly
minimum based on meter size, and a volumetri
c
r
a
t
e
c
h
a
r
g
e
d
per 100 cubic feet. The monthly minimums vary by m
e
t
e
r
s
i
z
e
and volumetric rates are specific to each user class whether
they are an inside or outside City user.
Rate Basis:The City regularly conducts updates to water and was
t
e
w
a
t
e
r
rates to ensure that rates being charged to customers reflect
the cost of providing water and wastewater servic
e
t
o
u
t
i
l
i
t
y
customers. These rate updates are based on an industry
standard cost of service analysis (COSA).
Why it is done:
Rates are updated on a regular basis for three p
r
i
m
a
r
y
objectives: 1) to support the financial health of the util
i
t
y
;
2
)
to charge all customers fairly and equitably for the services
they receive; and 3) to follow Montana’s legal requ
i
r
e
m
e
n
t
s
t
o
maintain reasonable rates and charges based on the service
s
provided and benefits received. All of these objectives are
achieved by using the COSA approach.
When is it done:The City maintains rate models that project 5 years
i
n
t
o
t
h
e
future and are updated annually or biannually. In 2015, the
water and wastewater models were updated to s
e
t
r
a
t
e
s
f
o
r
FY16 and FY17. In 2017, the models will again be upda
t
e
d
t
o
set rates for FY18 and possibly FY19 depending on the desire
of the city leaders at that time.
How it is done:The COSA is based on the annual net revenue require
m
e
n
t
s
for the City, including both day to day operating costs and the
costs of constructing capital facilities to continue
p
r
o
v
i
d
i
n
g
service to both new and existing customers. These reven
u
e
requirements are attributed to specific aspects of providing
service from treating water or wastewater to billing cu
s
t
o
m
e
r
s
.
Demand characteristics such as peak and average demand
for water or the strength of wastewater discharge
s
a
r
e
u
s
e
d
t
o
determine the total share of those costs for each user clas
s
.
T
h
e
graphic below is a simplification of the process from which
revenue requirements are allocated to the user class
e
s
.Cost of service-based rates are intended to collect
revenue from each user that is commensurate with
the cost associated with serving that user class.
Operation & Maintenance ExpensesCapital-Related Expenses
Rate Structure with User-Specific Charges Reflecting Cost of Service
COST OF SERVICE EVALUATION• Capacity-Related• Volume-Related• Account-Related• Strength-Related
USER CLASS 1Cost of Service USER CLASS 2 Cost of Service USER CLASS 3 Cost of Service
Determine total revenue requirements to be
recouped through user rates
Evaluate types of costs in terms of how they
are driven by each type of user class
Total cost to each type of user class
Divide by meter and water sales projections to
reflect cost of service-based rate
WATER & WASTEWATER UTILITY RATE FLYER
The Financial Link
RATES 101 City of Billings, MT
DRAFT5-19-15
1. The City of Billings re
g
u
l
a
r
l
y
r
e
v
i
e
w
s
t
h
e
w
a
t
e
r
a
n
d
w
a
s
t
e
w
a
t
e
r
r
a
t
e
s
a
n
d
i
s
conducting a forma
l
R
a
t
e
S
t
u
d
y
i
n
2
0
1
7
t
o
d
e
t
e
r
m
i
n
e
w
h
e
t
h
e
r
t
h
e
c
u
r
r
e
n
t
r
a
t
e
s
a
r
e
bringing in adequate rev
e
n
u
e
t
o
c
o
v
e
r
t
h
e
c
o
s
t
o
f
p
r
o
v
i
d
i
n
g
s
a
f
e
d
r
i
n
k
i
n
g
w
a
t
e
r
a
n
d
wastewater services
t
o
t
h
e
e
n
t
i
r
e
c
o
m
m
u
n
i
t
y
.
T
h
e
c
o
s
t
o
f
p
r
o
v
i
d
i
n
g
t
h
e
s
e
s
e
r
v
i
c
e
s
also accounts for planne
d
i
n
f
r
a
s
t
r
u
c
t
u
r
e
i
m
p
r
o
v
e
m
e
n
t
s
n
e
c
e
s
s
a
r
y
t
o
m
a
i
n
t
a
i
n
h
i
g
h
quality service. 2. The City of Billings
s
t
r
i
v
e
s
f
o
r
f
a
i
r
a
n
d
e
q
u
i
t
a
b
l
e
w
a
t
e
r
a
n
d
w
a
s
t
e
w
a
t
e
r
u
t
i
l
i
t
y
r
a
t
e
s
that are based on
h
o
w
m
u
c
h
w
a
t
e
r
a
c
u
s
t
o
m
e
r
u
s
e
s
.
• The City’s water rate structure consists of tw
o
c
o
m
p
o
n
e
n
t
s
:
a
f
i
x
e
d
m
o
n
t
h
l
y
charge based on t
h
e
s
i
z
e
o
f
t
h
e
w
a
t
e
r
m
e
t
e
r
a
t
e
a
c
h
c
o
n
n
e
c
t
i
o
n
,
a
n
d
a
s
e
r
i
e
s
o
f
volumetric rates asses
s
e
d
b
a
s
e
d
o
n
t
o
t
a
l
w
a
t
e
r
u
s
e
a
s
m
e
a
s
u
r
e
d
i
n
u
n
i
t
s
o
f
o
n
e
hundred cubic fee
t
(
C
C
F
)
,
e
q
u
i
v
a
l
e
n
t
t
o
7
4
8
g
a
l
l
o
n
s
.
T
h
e
r
a
t
e
p
e
r
o
n
e
h
u
n
d
r
e
d
cubic feet increases as
m
o
n
t
h
l
y
u
s
a
g
e
i
n
c
r
e
a
s
e
s
.
T
h
e
r
a
t
e
f
o
r
t
h
e
f
i
r
s
t
t
i
e
r
i
s
applied to each C
C
F
o
f
w
a
t
e
r
u
s
e
f
o
r
u
s
a
g
e
b
e
t
w
e
e
n
1
a
n
d
1
4
C
C
F
(
1
0
,
4
7
0
gallons), the second ti
e
r
r
a
t
e
i
s
f
o
r
u
s
a
g
e
b
e
t
w
e
e
n
1
5
a
n
d
4
3
C
C
F
(
3
2
,
1
6
0
gallons), the third t
i
e
r
r
a
t
e
i
s
a
p
p
l
i
e
d
f
o
r
u
s
a
g
e
b
e
t
w
e
e
n
4
4
a
n
d
1
0
0
C
C
F
(748,000 gallons), and
t
h
e
f
o
u
r
t
h
t
i
e
r
r
a
t
e
i
s
c
h
a
r
g
e
d
f
o
r
e
a
c
h
C
C
F
o
f
w
a
t
e
r
u
s
e
in excess of 100 CC
F
.• The City’s wastewater rate structure also co
n
s
i
s
t
s
o
f
t
w
o
c
o
m
p
o
n
e
n
t
s
:
a
f
i
x
e
d
monthly charge based o
n
t
h
e
s
i
z
e
o
f
t
h
e
w
a
t
e
r
m
e
t
e
r
a
n
d
a
v
o
l
u
m
e
t
r
i
c
c
h
a
r
g
e
that is applied to eac
h
C
C
F
o
f
w
a
t
e
r
u
s
e
.
3. The City of Bill
i
n
g
s
a
c
t
i
v
e
l
y
p
r
o
m
o
t
e
s
c
o
n
s
e
r
v
a
t
i
o
n
t
h
r
o
u
g
h
i
t
s
w
a
t
e
r
r
a
t
e
s
t
r
u
c
t
u
r
e
,
to both conserve its
w
a
t
e
r
s
u
p
p
l
y
a
n
d
t
o
m
a
n
a
g
e
l
o
n
g
-
t
e
r
m
c
a
p
i
t
a
l
n
e
e
d
s
.
A
s
t
h
e
City continues to
g
r
o
w
,
a
d
d
i
t
i
o
n
a
l
i
n
f
r
a
s
t
r
u
c
t
u
r
e
w
i
l
l
b
e
n
e
e
d
e
d
t
o
m
e
e
t
i
n
c
r
e
a
s
e
d
capacity requirement
s
.
T
h
e
i
n
t
e
n
t
o
f
t
h
e
c
o
n
s
e
r
v
a
t
i
o
n
r
a
t
e
s
t
r
u
c
t
u
r
e
i
s
t
o
e
n
a
b
l
e
users to work tog
e
t
h
e
r
t
o
m
a
n
a
g
e
t
o
t
a
l
p
e
a
k
w
a
t
e
r
u
s
e
d
e
m
a
n
d
s
,
a
n
d
t
h
u
s
w
a
s
t
e
w
a
t
e
r
flows, to effectively
d
e
l
a
y
f
u
t
u
r
e
w
a
t
e
r
a
n
d
w
a
s
t
e
w
a
t
e
r
s
y
s
t
e
m
e
x
p
a
n
s
i
o
n
n
e
e
d
s
.
T
h
i
s
saves everyone m
o
n
e
y
.
4. The City’s rate-se
t
t
i
n
g
p
r
o
c
e
s
s
i
n
c
l
u
d
e
s
r
e
v
i
e
w
i
n
g
a
n
d
u
p
d
a
t
i
n
g
a
l
l
a
s
p
e
c
t
s
o
f
t
h
e
rate structure includin
g
f
i
x
e
d
m
o
n
t
h
l
y
c
h
a
r
g
e
s
,
u
s
a
g
e
c
h
a
r
g
e
s
(
p
e
r
h
u
n
d
r
e
d
c
u
b
i
c
feet of water used),
a
n
d
i
m
p
a
c
t
f
e
e
s
t
h
a
t
h
e
l
p
o
f
f
s
e
t
c
a
p
i
t
a
l
c
o
s
t
s
a
n
d
e
n
s
u
r
e
t
h
e
c
o
s
t
of growth is carried by t
h
o
s
e
d
r
i
v
i
n
g
t
h
e
c
o
s
t
.
T
h
i
s
s
t
u
d
y
e
v
a
l
u
a
t
e
s
r
a
t
e
s
f
o
r
a
l
l
w
a
t
e
r
and wastewater use
r
s
.
CITY OF BILLINGS |
4
-
1
7
-
1
7RATE STUDY TA
L
K
I
N
G
P
O
I
N
T
S
PARTICIPATING TEAM MEMBERS
• Miranda Kleven - Project Manager
• Ryan Graf - Financial Aanlyst
• Nikki Jacobi - Financial Analyst
AE2S BOZEMAN UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS PROPOSAL 3.2
RELATED EXPERIENCE | 3
Inver Grove Heights, MinnesotaCOMPREHENSIVE UTILITY CAPITAL PLANNING AND RATE STUDY
UTILITY FINANCIAL PLANS DUE FOR A REFRESH
The City of Inver Grove Heights was looking to refresh its
approach to revenue generation for its water and sewer utilities.
The City identified that its utility financial plans had been on auto-
pilot and required a fresh perspective to either make adjustments
or reinforce current approaches. The City retained AE2S Nexus in
2022 to complete a Comprehensive Utility Capital Planning and
Rate Study. Goals of the study included:
• Fair, equitable, and sufficient rate projections;
• Development of a rate structure that is reasonable to
administer and easily articulated to policymakers and
customers; and
• Reserve funding recommendations that achieve adequate
system renewal and replacement.
CONCERNS ADDRESSED
AE2S Nexus developed a robust 10-year rate model that included
a cost of service analysis and a desktop renewal forecasting and
reserve funding analysis. A series of rate design recommendations
were analyzed to find the right balance in rate structure changes
KEY PROJECT ELEMENTS• Capital Reserve Target Establishment
• 10-Year Rate Model with COSA
• Rate Structure to Correct Geographic Inequities
• System Size: 15,000 User Accounts
to address inequities identified as part of the cost of service
analysis and maintain revenue sufficiency. The results of the 10-
year rate model projected rate increases to meet fund objectives
for the 2023 to 2032 planning horizon, including variations in
the increases between fixed and volumetric rates to maintain
appropriate fixed revenue targets.
WELL INFORMED AND READY TO HIT THE GROUND
RUNNING
The City Council adopted the 2023 recommended rate structure
at the conclusion of the rate study. The provided 10-year rate
models will serve as a financial tool to assist in management of the
financial health of the water and sewer utilities, as the City looks to
bring annual rate recommendations to the City Council for 2024
and beyond.
DATE2022 - 2023
CLIENTCity of Inver Grove Heights
CLIENT CONTACTBrian ConnollyPublic Works Director651-450-2571
PARTICIPATING TEAM MEMBERS
• Jacob Strombeck - Project Manager
• Nikki Jacobi - Financial Analyst
• Dylan Walski - Financial Analyst
AE2S BOZEMAN UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS PROPOSAL 3.3
RELATED EXPERIENCE | 3
This work gave AE2S insight into the cost of water
rights and the high costs that the City will face for
water supply and distribution as it continues to
grow at a rapid pace.
DISTRIBUTION SYSTEM RISK ASSESSMENT
RESPONSE PLAN (DSRARP)
The DSRARP provided the City of Bozeman with a decision
making tool for establishing appropriate condition assessment
intervention, capital improvement planning, and establishing a
prioritizing methodology to maximize the use of available funding
on an annual basis.
The primary objective was to assist the City with
optimizing prioritization of funding water main
replacement projects so that the City uses its
available budget in the most cost-effective manner
possible.
This work gave us additional insight into the City’s
CIP funding process, which will be a major factor in
the cost of service analysis.
Bozeman, MontanaCITY OF BOZEMAN PLANNING AND ENGINEERING PROJECT EXPERIENCE
AE2S has completed several projects with the City of Bozeman
that have given us an excellent understanding and appreciation
of the costs the City incurs for water and wastewater services,
including:
• Integrated Water Resource Plan
• Distribution System Risk Assessment Response Plan
• Water Facility Plan Update
• Lyman Creek Water System Expansion
• Drought Management Plan
A brief summary of each of these projects and the relevance to cost
of service follows.
INTEGRATED WATER RESOURCE PLAN (IWRP)
Bozeman’s water supply is limited by its location in the headwaters
of the Gallatin River watershed and the closed basin status of
groundwater. AE2S completed the IWRP (with CH2M as a
subconsultant) in 2014 to clarify current water supplies, identify
future water supply needs, and assess the supplies susceptibility to
climate change.
The IWRP quantified a future water supply gap, the extent of
which will depend on growth rates, water use/conservation,
securitization of additional water supplies, and climate change.
Alternatives to decrease or eliminate the water supply gap were
developed and screened for feasibility. The evaluation process
included close collaboration with a City Commission appointed
Technical Advisory Committee, to identify the most feasible
portfolios and cost-effective approaches. The final IWRP included
recommendations for implementation of a water conservation
program and to adopt a drought management plan.
KEY PROJECT ELEMENTS• Capital Improvements Project Planning
• CIP Prioritization Based on Risk
• Future Water Demand Projections
• Non-Potable Irrigation Study
• Drought Management Rate Structures
DATE2011 - Present
CLIENTCity of Bozeman
CLIENT CONTACTSBrian Heaston Engineer III 406-582-2280
PARTICIPATING TEAM MEMBERS(MULTIPLE PROJECTS AND ROLES)
• Scott Buecker
• Miranda Kleven
• Ryan Graf
• Jacob Strombeck
• Nikki Jaocobi
• Dylan Walski
• Kayla Mehrens
AE2S BOZEMAN UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS PROPOSAL 3.4
RELATED EXPERIENCE | 3
projects that the City simply cannot afford to undertake at this
time.
The rate study must balance what is needed with
what is affordable for Bozeman residents.
DROUGHT MANAGEMENT PLAN
The Drought Management Plan (DMP) grew out of the IWRP,
with the recognition that the City could be headed for a water
supply gap, and that without water conservation, or with a
significant drought, the gap would present itself sooner rather
than later. The DMP outlines the City’s vulnerability to drought,
describes ways to mitigate that vulnerability, provides water supply
data consolidation for use in a new drought model, and lays out a
drought response strategy for implementation.
Part of the drought mitigation and response
strategy hinges on the recommendation to
implement conservation based rate structures
or water shortage surcharges. AE2S provided an
overview and examples of conservation-driven rate
structures and/or drought surcharges, to enable the
City to consider methods it may wish to utilize in
the forthcoming rate study work.
WATER FACILITY PLAN UPDATE
The water facility plan developed by the AE2S team addresses
the many challenges facing the City, including rapid growth and
the approaching large infrastructure improvements that will be
necessary to accommodate growth while continuing to provide
best-in-class service to existing customers. The team developed a
unique CIP prioritization matrix to best balance available budgets
with business risk and level of service goals, and delivered the tool
to the City to enable staff to continually reevaluate and reprioritize
CIP projects as needs dictate over the coming years.
As a result, we understand the City’s critical needs
as well as potential flexibility in the CIP depending
on growth and existing system condition. This
enhances our ability to assess the City’s cost of
service and best design a rate structure to cover
the City’s water infrastructure needs.
LYMAN CREEK WATER SYSTEM EXPANSION
The Lyman Creek Water System Expansion project was originally
intended to increase Lyman spring’s yield, improve capture of
the yield, and replace the existing reservoir and portions of the
transmission pipeline. The project has since morphed to simply
enabling better capture of existing yield. This was due to multiple
factors, but in part due to the large cost of the reservoir and
transmission piping project. Lyman is one of many water resource
CITY OF BOZEMAN PLANNING AND ENGINEERING PROJECT EXPERIENCE (cont.)
“We are so thankful for all the hard work that the AE2S Team put into our draft recommendations. It was clear to everyone in our Engineering ground that this format and level of analysis will be the new standard moving forward. We can’t thank the AE2S Team enough for all the knowledge and experience they brought to the table. I am confident that the citizens of Bozeman will benefit for years to come.”
Jon Henderson, City of Bozeman GIS Division, Strategic Services Director
““
AE2S BOZEMAN UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS PROPOSAL 3.5
RELATED EXPERIENCE | 3
Owatonna, MinnesotaWASTEWATER COST OF SERVICE AND RATE STUDY
The City of Owatonna is preparing for a $50M capital investment
to upgrade and expand its wastewater treatment facility to
prepare for system growth, improve treatment performance, and
meet pending treatment regulations. To ensure their utility is
positioned to fund and finance the project, the City retained the
AE2S and Nero Engineering team to conduct a Wastewater Cost
of Service Analysis and Rate Study.
With the plant expansion planned to be completed by 2024, this
was selected as the base year for the analysis and gives the City
the ability and time to make smaller rate adjustments to get to
their target financial position by then. The funding strategy for
the expansion was determined to be a combination of reserve cash
and the State of Minnesota Clean Water State Revolving Fund
program. The City is also exploring grant funding opportunities
through the state, and the financial model was developed to look at
different combinations of the three funding sources.
Four rate structure alternatives were explored: two options for
base monthly charges and two options for monthly volumetric
KEY PROJECT ELEMENTS
• Cost Evaluation of Present and Future Conditions
• Sewer Access Charge Evaluation and Updates
• User-Friendly Excel Model Provided to Client
use-based charges. The two options for base charges were either
based on user class (single family, commercial, industrial, etc.) or a
base charge based on water meter size. As for volumetric rates, the
two options explored included winter water usage-basis or total
year-round water usage-basis. Each option has their respective
pros and cons that need to weighed.
Other key project elements included: (1) a detailed plant
operations and maintenance cost evaluation for both the existing
system and planned expansion to allocate costs appropriately to
individual user classes and for determining strength surcharges
(BOD, TSS, and phosphorous); (2) an evaluation/update to the
City’s sewer access charges to better align with financial targets
and approaches used in neighboring communities; and (3)
developing a user-friendly Excel-based financial model for use by
the City that will allow them to make ongoing adjustment and
refinements to the model.
DATE2019 - Present
CLIENTCity of Owatonna
OWNER CONTACTSean Murphy Director of Public Works507-774-7307
PARTICIPATING TEAM MEMBERS
• Miranda Kleven - Financial Analyst
• Ryan Graf - Financial Analyst
• Jacob Strombeck - Project Manager
• Nikki Jacobi - Financial Analyst
• Dylan Walski - Financial Analyst
AE2S BOZEMAN UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS PROPOSAL 3.6
RELATED EXPERIENCE | 3
UTILITY FINANCIAL SERVICESFargo, North Dakota
The City of Fargo is the largest city in North Dakota and is the
hub of commercial and economic activity between Billings and
Minneapolis. The City provides water, wastewater, stormwater,
solid waste, and street light service to residents and over a dozen
outside user wholesale customers across the metro area. As with
many communities, the City is facing significant infrastructure
challenges – from currently constructing a $120 million expansion
at its water plant, to planning for a $140 million expansion at their
wastewater plant. The City has also undertaken other significant
capital investment, namely in flood protection through partnering
with the County and the US Army Corps of Engineers on the FM
Area Diversion. AE2S and AE2S Nexus have been advising the
City on engineering and financial matters since first providing
master plan services in 2005 and have continued to grow our
relationship every year since. A sample of relevant projects follows.
WATER UTILITY SERVICE | INTERCONNECT WITH WEST FARGO
When a suburb of the City of Fargo requested water utility service,
the City’s utility director relied upon the AE2S/AE2S Nexus
team to provide critical advice throughout the process. Our team
analyzed the technical engineering side of how best to provide
service, the appropriate method to charge for service based upon
existing service levels and the method of connection, provided
full design and construction engineering services, and drafted/
implemented a communications plan to notify West Fargo
residents of the impact of switching water supplies.
UTILITY RATE PLANNING | 2017 WATER AND WASTEWATER RATE SETTING
The City has worked with AE2S Nexus since 2009 for rate planning
services – with recent years taking an annual review of City utility
finances to determine appropriate rates for the coming years.
The 2017 rate analysis reviewed financials and assisted the City
KEY PROJECT ELEMENTS
• Utility Financial Planning
• Budgeting Support
• Funding Development
• Revenue Adequacy Modeling
• Cost of Service Analysis
• Rate Design
• Presentations to Stakeholders
• Public Engagement
in setting rates for the 2017 calendar year. This analysis includes
a detailed review of capital planning, growth assumptions, user
accounts, flow projections, and overall utility finances to identify a
prudent approach to rate setting into the future.
UTILITY FINANCIAL PLANNING | OUTSIDE WASTEWATER USER RATE PLANNING
The City of Fargo has nearly a dozen outside wastewater users
today, with plans to hook up additional communities in the
future. These agreements have been put in place over a number of
years and vary from community to community. The City looked
to AE2S to provide a streamlined methodology for charging
these outside communities that will apply to new users hooking
up and existing users as the agreements allow for change. This
methodology provides a way for the City to ensure they continue
to equitably charge users and fairly recoup operating costs.
UTILITY RATE PLANNING | STORMWATER USER CHARGE STUDY
Recognizing the need for updates to the way they recoup
stormwater management costs throughout their community,
the City retained AE2S Nexus to assist in reviewing current
management practices and developing recommendations for
changes to the current approach that more accurately and equitably
charge users for the overall costs to the City. As this study is
currently ongoing, the team is taking a holistic approach that
incorporates budget review across multiple City departments
as well as land use and GIS analysis to develop new costing
approaches as well as rate design alternatives for the City’s review.
DATE2005 - Present
CLIENTCity of Fargo
CLIENT CONTACTMichael RedlingerCity Administrator701-241-1310
PARTICIPATING TEAM MEMBERS(MULTIPLE PROJECTS AND ROLES)
• Miranda Kleven
• Ryan Graf
• Jacob Strombeck
• Dylan Walski
• Nikki Jacobi
AE2S BOZEMAN UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS PROPOSAL 4.1
COST PROPOSAL | 4
Task Task Description
Scott
Buecker
$254
Miranda
Kleven
$220
Ryan
Graf
$230
Nikki Jacobi/
Kayla Mehrens
$186
Jacob
Strombeck
$235
Dylan
Walski
$112
Admin
$122
Subtotal
Budget
Hours
Labor
Fees Expenses Total Fee -
2023
1 General Communications and Project Management
1.1 Kick-off Meeting 4 4 2 4 2 4 6 26 $4,750 -$4,750
1.2 Project Management/Weekly or Bi-Weekly Progress Communications -----------
1.3 FY2024 6 30 36 $8,124 $8,124
1.4 Presentation to City Commission 4 20 -----24 $5,416 $1,200 $6,616
Task 1 Subtotal 14 54 2 4 2 4 6 86 $18,290 $1,200 $19,490
2 Water Rate Model Development
2.1 Review and Update User Profile and Existing Methodology ---8 -112 -120 $14,032 -$14,032
2.2 Review and Update Revenue Requirements Input to Match City Format as Needed ---8 ---8 $1,488 -$1,488
2.3 Review and Update Capital Inputs ---4 4 --8 $1,684 -$1,684
2.4 Update Rate Model Dashboard and Ledger Tab to Match City’s Desired Format ---6 ---6 $1,116 -$1,116
2.5 Review and Update Conservation Reserve and Rate Approach Assumptions and Calculations -12 -4 ---16 $3,384 -$3,384
2.6 Review Policy Objectives and Reserve Guidelines, Update Model as Necessary 1 2 2 6 ---11 $2,270 -$2,270
2.7 Review Update Model with City Staff -2 -4 ---6 $1,184 -$1,184
Task 2 Subtotal 1 16 2 40 4 112 -175 $25,158 -$25,158
3 Wastewater Rate Model Development
3.1 Review and Update User Profile and Existing Methodology -----8 -8 $896 -$896
3.2 Review and Update Revenue Requirements Input to Match City Format as Needed -----8 -8 $896 -$896
3.3 Review and Update Capital Inputs ----4 4 -8 $1,388 -$1,388
3.4 Update Rate Model Dashboard and Ledger Tab to Match City’s Desired Format -----6 -6 $672 -$672
3.5 Review Policy Objectives nd Reserve Guidelines, Update Model as Necessary 1 2 2 --6 -11 $1,826 -$1,826
3.6 Review Update Model with City Staff --2 --4 -6 $908 -$908
Task 3 Subtotal 1 2 4 -4 36 -47 $6,586 -$6,586
4 Stormwater Rate Model Development
4.1 Review and Update User Profile and Existing Methodology ---8 ---8 $1,488 -$1,488
4.2 Review and Update Revenue Requirements Input to Match City Format as Needed Total Hours ---8 ---8 $1,488 -$1,488
4.3 Review and Update Capital Inputs ---4 4 --8 $1,684 -$1,684
4.4 Update Rate Model Dashboard and Ledger Tab to Match City’s Desired Format ---6 ---6 $1,116 -$1,116
4.5 Review Policy Objectives and Reserve Guidelines, Update Model as Necessary 1 2 -6 2 --11 $2,280 -$2,280
4.6 Review Updated Model with City Staff ---4 2 --6 $1,214 -$1,214
Task 4 Subtotal 1 2 -36 8 --47 $9,270 -$9,270
5 Water COSA
5.1 Methodology and Assumption Review -1 -4 ---5 $964 -$964
5.2 Develop Test Year Revenue Requirements and Usage Profile --2 16 ---18 $3,436 -$3,436
5.3 Model Updates ---20 ---20 $3,720 -$3,720
5.4 Progress Meeting: Draft Water COSA Results 1 2 1 6 ---10 $2,040 -$2,040
5.5 Finalize Water COSA, Prepare Memorandum -2 4 24 ---30 $5,824 -$5,824
Task 5 Subtotal 1 5 7 70 ---83 $15,984 -$15,984
4 | COST PROPOSAL
The table on the
following pages
identifies specific
scope items and
estimated hours and
costs to complete each
item. The identified
scope items are based
on our understanding
of your priorities to be
completed as you plan
your FY25 budget.
Beyond FY25 budget
planning efforts, we
anticipate that your
financial consultation
needs will vary. We
have listed potential
on-going services but
have not assigned
costs as they will be
dependent upon the
specific requests.
For budgeting
purposes, we suggest
a placeholder value
of $50,000 annually
beyond the first year.
AE2S BOZEMAN UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS PROPOSAL 4.2
COST PROPOSAL | 4
Task Task Description
Scott
Buecker
$254
Miranda
Kleven
$220
Ryan
Graf
$230
Nikki Jacobi/
Kayla Mehrens
$186
Jacob
Strombeck
$235
Dylan
Walski
$112
Admin
$122
Subtotal
Budget
Hours
Labor
Fees Expenses Total Fee -
2023
6 Wastewater COSA
6.1 Methodology and Assumption Review -1 ---4 -5 $668 -$668
6.2 Develop Test Year Revenue Requirements and Usage Profile --2 --16 -18 $2,252 -$2,252
6.3 Model Updates -----20 -20 $2,240 -$2,240
6.4 Progress Meeting: Draft Wastewater COSA Results 1 2 1 --6 -10 $1,596 -$1,596
6.5 Finalize Wasteater COSA, Prepare Memorandum -2 4 --24 -30 $4,048 -$4,048
Task 6 Subtotal 1 5 7 --70 -83 $10,804 -$10,804
7 Water Rate Design
7.1 Current Rate Review Based on COSA Results and Rate Performance -1 -4 ---5 $964 -$964
7.2 Develop Alternative Rate Scenarios -2 -16 ---18 $3,416 -$3,416
7.3 Review Existing Fee Structure and Develop Recommendations -2 -4 ---6 $1,184 -$1,184
7.4 Regional Comparison - Rates and Fees 1 4 -6 ---11 $2,250 -$2,250
7.5 Evaluate Rate Sensitivity and Elasticity, Compare Existing and Alternative Rates -4 -8 ---12 $2,368 -$2,368
7.6 Optional: Probabalistic Revenue Forecasting Model Update -2 -12 ---14 $2,672 -$2,672
7.7 Progress Meeting: Draft Rate Design Considerations 1 2 2 6 ---11 $2,270 -$2,270
7.8 Finalize Recommended Rate Design -2 -6 ---8 $1,556 -$1,556
Task 7 Subtotal 2 19 2 62 ---85 $16,680 -$16,680
8 Wastewater Rate Design
8.1 Current Rate Review Based on COSA Results and Rate Performance --1 --4 -5 $678 -$678
8.2 Develop Alternative Rate Scenarios --2 --16 -18 $2,252 -$2,252
8.3 Review Existing Fee Structure and Develop Recommendations --2 --4 -6 $908 -$908
8.4 Regional Comparison - Rates and Fees 1 -4 --6 -11 $1,846 -$1,846
8.5 Evaluate Rate Sensitivity and Elasticity, Compare Existing and Alternative Rates --4 --8 -12 $1,816 -$1,816
8.6 Progress Meeting: Draft Wastewater Rate Design Considerations 1 2 2 --6 -11 $1,826 -$1,826
8.7 Finalize Recommended Rate Design --2 --6 -8 $1,132 -$1,132
Task 8 Subtotal 2 2 17 --50 -71 $10,458 -$10,458
9 Stormwater Rate Design
9.1 Current Rate Review and Rate Performance -1 -4 1 --6 $1,199 -$1,199
9.2 Develop Alternative Rate Scenarios ---16 2 --18 $3,446 -$3,446
9.3 Review Existing Fee Structure and Develop Recommendations ---2 2 --4 $842 -$842
9.4 Regional Comparison - Rates and Fees ---6 4 --10 $2,056 -$2,056
9.5 Evaluate Rate Sensitivity, Compare Existing and Alternative Rates ---8 4 --12 $2,428 -$2,428
9.6 Progress Meeting: Draft Stormwater Rate Design Considerations 1 2 2 6 4 --15 $3,210 -$3,210
9.7 Finalize Recommended Rate Design ---6 2 --8 $1,586 -$1,586
Task 9 Subtotal 1 3 2 48 19 --73 $14,767 -$14,767
Cost Proposal (continued)
AE2S BOZEMAN UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS PROPOSAL 4.3
COST PROPOSAL | 4
Task Task Description
Scott
Buecker
$254
Miranda
Kleven
$220
Ryan
Graf
$230
Nikki Jacobi/
Kayla Mehrens
$186
Jacob
Strombeck
$235
Dylan
Walski
$112
Admin
$122
Subtotal
Budget
Hours
Labor
Fees Expenses Total Fee -
2023
10 Water Scenario Analysis
10.1 Rate Scenario 1 -2 2 4 2 --10 $2,114 -$2,114
10.2 Rate Scenario 2 -2 2 4 2 --10 $2,114 -$2,114
10.3 Rate Scenario 3 -2 2 4 2 --10 $2,114 -$2,114
10.4 User Impact Comparison ---2 ---2 $372 -$372
10.5 Progress Meeting: Water Rate Scenario Analyses 1 1 1 4 1 --8 $1,683 -$1,683
Task 10 Subtotal 1 7 7 18 7 --40 $8,397 -$8,397
11 Wastewater Scenario Analysis
11.1 Rate Scenario 1 --2 -2 4 -8 $1,378 -$1,378
11.2 Rate Scenario 2 --2 -2 4 -8 $1,378 -$1,378
11.3 Rate Scenario 3 --2 -2 4 -8 $1,378 -$1,378
11.4 User Impact Comparison -----2 -2 $224 -$224
11.5 Progress Meeting: Wastewater Rate Scenario Analyses 1 1 1 -1 4 -8 $1,387 -$1,387
Task 11 Subtotal 1 1 7 -7 18 -34 $5,745 -$5,745
12 Stormwater Rate Scenario Analysis
12.1 Rate Scenario 1 ---4 2 --6 $1,214 -$1,214
12.2 Rate Scenario 2 ---4 2 --6 $1,214 -$1,214
12.3 Rate Scenario 3 ---4 2 --6 $1,214 -$1,214
12.4 User Impact Comparison ---2 ---2 $372 -$372
12.5 Progress Meeting: Stormwater Rate Scenario Analyses 1 1 1 4 1 --8 $1,683 -$1,683
Task 12 Subtotal 1 1 1 18 7 --28 $5,697 -$5,697
Total Project Hours/Expenses Baseline 27 117 58 296 58 290 6 852 $147,836 $1,200 $149,036
Cost Proposal (continued)
Supporting the City
over the next 5-years
will be critical as the
$120M in planned
capital improvement
looks to move closer to
reality. We understand
that final capital project
costs are rarely equal
to the original cost
estimates. The City’s
decision to retain a
financial consultant for
five years is smart, as
a consistent team can
easily and efficiently
circle back to make
modifications as
conditions change. We
will stand by to support
the City as you fine
tune your capital plans
and address on-going
challenges over this
period.
On-Call Services - As Requested
Annual Rate Model Review/Update - Water
Annual Rate Model Review/Update - Wastewater
Annual Rate Model Review/Update - Stormwater
Additional Scenario Analyses
Master Planning Support
Additional Presentations/Meeting Attendance
Rates Shown are 2023 Rates: These rates are subject to change each year on January 1.
AE2S BOZEMAN UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS PROPOSAL 5.1
AFFIRMATION OF NONDISCRIMINATION | 55 | AFFIRMATION OF NONDISCRIMINATION
Attachment A
NONDISCRIMINATION AND EQUAL PAY AFFIRMATION
____________________________________(name of entity submitting) hereby affirms it will not
discriminate on the basis of race, color, religion, creed, sex, age, marital status, national origin,
or because of actual or perceived sexual orientation, gender identity or disability and
acknowledges and understands the eventual contract will contain a provision prohibiting
discrimination as described above and this prohibition on discrimination shall apply to the hiring
and treatments or proposer’s employees and to all subcontracts.
In addition, ____________________________________(name of entity submitting) hereby
affirms it will abide by the Equal Pay Act of 1963 and Section 39-3-104, MCA (the Montana Equal
Pay Act), and affirm it will abide by the above and that it has visited the State of Montana Equal
Pay for Equal Work “best practices” website, or equivalent “best practices” publication and has
read the material.
______________________________________
Name and title of person authorized to sign on behalf of submitter
Advanced Engineering and Environmental Services, LLC (AE2S)
Megan Houser, Chief Human Resources Officer
Advanced Engineering and Environmental Services, LLC (AE2S)
AE2S BOZEMAN UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS PROPOSAL A.1
RESUMES | AA | RESUMES
Miranda Kleven, PE Project Manager
SPECIFIC RELEVANT EXPERIENCE
• Water and Water Reclamation Rate Study, Rapid City, SD - Financial Analyst.
Efforts consisted of rate design and revenue adequacy analyses, including detailed
funding scenario analyses addressing financing alternatives for the anticipated
construction of two new water treatment facilities and improvements to the existing
water reclamation facility, on-going rate modeling, and regional rate support. Specific
tasks included Revenue Adequacy evaluations, State Revolving Fund debt management
and surcharge calculations, regional rate support and associated contract development
assistance, and industrial service evaluations.
• Water Rate Study, Watertown Municipal Utilities, Watertown, SD - Project
Manager. Cost of Service Analysis, Five-Year Revenue Adequacy Analysis, and Rate
Design to evaluate the existing rate structure to ensure rates are fair and equitable for
all users, develop a rate plan for a financially self-sufficient water utility, and
develop reserve funding strategies.
• Water Rate Study, Brandon, SD - Project Manager. Development of
rate structure modifications to support conservation initiatives, as well as
the development of a rate schedule to adequately meet full cost recovery.
• Water Utility Rate Study, Box Elder, SD - Financial Analyst. Conducted
a comprehensive rate study to improve the City’s understanding of
the utility finances and identify areas to improve overall fiscal health.
The study included a cost of service analysis, rate design evaluation,
reserve analysis, revenue adequacy modeling, and multiple public
presentations to communicate to the public throughout the study
and prior to enacting new water rates.
• Water and Sewer Utility Rate Study, Minot, ND - Financial
Engineer. Providing annual financial support for the cost of
service associated with the Northwest Area Water Supply since the
completion of a comprehensive water rate study in 2008. Annual
efforts include working with City and State Water Commission staff
to calculate the appropriate charge to the State for treated water from the
Minot WTP.
• Water and Wastewater Rate Study, Billings, MT - Financial Analyst. Cost
of service and rate design study for the City’s water and wastewater utilities.
The AE2S Nexus Project team completed updates to water and wastewater cost
of service-based rate models, and recommended two years of rates for retail and
resale water customers and retail and wholesale wastewater customers. Have
been providing this service on an on-going basis since 2014.
Ms. Kleven has over 23 years of experience in providing support to utilities in cost
of service-based rate-setting, budgetary, reserve, capital planning, and capital cost
allocation efforts designed to promote financial health and sustainability. She has
worked with rural/regional water and municipal water, wastewater, stormwater systems
in the evaluation and implementation of fair and equitable cost of service-based rate
structures and in the evaluation of revenue adequacy. She has collected data for and
coordinated the production of the AE2S Annual Rate Survey for 22 years, and with that
has broad knowledge of regional rate-setting practices and approaches. Her work
with the rate survey has also included the collection and evaluation of operational and
financial benchmarking statistics for municipal water and wastewater systems as well
as rural systems throughout the region.
EDUCATION
Bachelor of Science, Chemical
Engineering, University of North
Dakota
REGISTRATIONS
Professional Engineer: North
Dakota
MSRB Series 50 Qualified
Municipal Advisor
Representative
TRAINING
Financial Management: Cost of
Service Rate Making, AWWA
CONTACT
Miranda.Kleven@ae2s.com
T: 701-746-8087
C: 701-740-3388
WHY MIRANDA?
Miranda has not only led a
number of our larger rate
studies, but she manages our
internal efforts to publish the
Annual Utility Rate Survey
comparing rates across the
region. In 2020 she authored a
white paper prescribing reserve
planning strategies for capital
renewal and full cost recovery.
AE2S BOZEMAN UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS PROPOSAL A.2
RESUMES | A
Scott Buecker, PE Principal-in-Charge
Mr. Buecker is a wastewater and water process design and consulting engineer with 23
years of experience in the water and wastewater treatment and conveyance
industries. He has worked as a project manager, design manager, and senior process
engineer; and currently leads AE2S’ Wastewater Practice. His experience spans
permitting and funding procurement, facilities planning, conceptual and preliminary
design, preparation of final plans and specifications, and construction management.
He has prepared numerous treatability studies, treatment capacity analyses, treatment
process and pumping optimization evaluations, hydraulic analyses, energy efficiency
analyses, facility designs, treatment plant operations guides, O&M manuals, facility
plans, preliminary design reports, and construction documents for a broad range of
water and wastewater treatment projects.
EDUCATIONMaster of Science, Civil & Environmental Engineering,
University of Wisconsin
REGISTRATIONS
Professional Engineer: Montana, Arizona, California, Oregon
CONTACTScott.Buecker@ae2s.comT: 406-219-2633
C: 406-570-5184
WHY SCOTT?Scott has a wealth of experience in the water and wastewater fields. He has demonstrated his capacity to oversee critical projects for the City of Bozemen, demonstrating a deep comprehension of your infrastructure and overarching objectives, which he will apply to this project with a holistic viewpoint.
SPECIFIC RELEVANT EXPERIENCE
• Water and Wastewater Utility System Cost of Service and Rate Design Study, Bozeman,
MT - Engineering Advisor. Critical to this project was how the cost of new capital and
replacement capital is appropriately planned for over the study horizon. In the end, these
costs were integrated into the overall rate structure and user charge recommendations for
the City.
• Gallatin Canyon Sewer Preliminary Engineering Report, Big Sky, MT - Project Manager.
Assisted in negotiating for Big Sky Resort Area District Funding for this project.
Provided process engineering and developed the Preliminary Engineering Report for
treatment and disposal alternatives for collection, treatment, and disposal of Gallatin
Canyon wastewater in collaboration with WGM. Prepared the report and submitted to
DEQ under tight deadlines for the GCCWSD to apply for ARPA funding. Provided an
EOPCC and project schedule to inform the ARPA application.
• Water Reclamation Facility Upgrade, Livingston, MT - Project Manager.
Preliminary and final design, funding (State and Federal) procurement assistance, bid
services and construction administration for upgrades to the City of Livingston’s 1.8
MGD WRF. Upgrades included improvements to the City’s grinding, screening, grit
removal, and influent pump station, including code analyses for NFPA 820 compliance.
In total, the project included overhaul/replacement of four wastewater pumping stations.
Scott was able to tailor the design documents to assist the City with securing Federal
grant and loan funding to minimize cost to Livingston ratepayers.
• Reuse Management Plan, Big Sky County Water & Sewer District (District), Big
Sky, MT - Project Manager. Study and report summarizing and updating Montana
DEQ on the District’s reuse operations and strategic planning. Determination of
reuse capacity for MBR Class A-1 effluent based on complex Circular 2 requirements.
Assessment of reuse operations based on existing stakeholder contractual
agreements and nearby surface water TMDLs. Development of chain of custody
framework for improved reuse operations and limits to District liability as a reuse
water provider. Provided critical water balance and nutrient loading analysis
for reuse infrastructure planning. Developed cost and capacity assessment for
promising reuse applications to enhance future reuse capacity.
• Wastewater Reuse and Disposal Study, Shasta Lake, CA - Project Manager.
Delivered a multi-faceted Reuse and Disposal Study to the City, collaborating
with California Regional Water Quality Control, California Department of Fish
and Game, and California Department of Natural Resources to land on continued
discharge to the effluent dominated Churn Creek with an upgrade of the WRRF from
Oxidation Ditch to 5-Stage Bardenpho, Filtration and UV Disinfection Facility.
Simultaneously assisted with a reuse pump station and forcemain evaluation for
expanded use of the plant effluent, including permitting and funding applications and
procurement assistance to the City.
AE2S BOZEMAN UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS PROPOSAL A.3
RESUMES | A
Ryan Graf, MPA QA/QC
Mr. Graf is a dedicated financial management consultant with experience in utility
financial policies, utility rate studies and cost of service, financial impacts of asset
management, funding programs, and regulatory considerations. He has over eight
years of experience providing financial analysis and guidance for utility management,
funding development, and regulatory compliance. He has worked with municipal water,
wastewater, stormwater, and solid waste utilities, city administrations of sizes from as
little as 500 people to as many as 125,000 people, as well as rural water systems.
EDUCATION
Master of Public Affairs, Public
Finance and Policy Analysis,
Indiana University
REGISTRATIONS
MSRB Series 54 Municipal
Advisor Principal
TRAINING
Financial Management: Cost of
Service Rate Making, AWWA
CONTACT
Ryan.Graf@ae2s.com
T: 701-746-8087
C: 218-791-5847
WHY RYAN?
Ryan’s experience with a
wide variety of rate studies
throughout the region help
to deliver targeted, impactful
results that get to the heart of
your concerns.
SPECIFIC RELEVANT EXPERIENCE
• Water Rate Study, Watertown Municipal Utilities, Watertown, SD - Financial
Analyst. This project provides the Watertown Municipal Utilities with a long-
term financial plan that includes a detailed cost of service analysis (COSA) and
development of a series of recommended rate structure modifications. The end
product includes concepts of asset management combined with the City’s capital
construction plans to create a roadmap for the future that ensures the water utility is
financially stable and flexible enough to adjust to changes as they occur.
• Utility Rate Study, West Fargo, ND - Financial Analyst. West Fargo is a growing
community with growing needs in their utility infrastructure. Ryan worked as a lead
analyst on this project to help the City of West Fargo understand how the growth
(as well as regionalization within their utility services) leads to changes in funding
utility operations and how to fund those changes. The approach was complicated as
the City looks to right-size their infrastructure funding policies and how they balance
reinvestment in capital for established neighborhoods with new capital on the fringe.
Overall, the City is now on a more sustainable path forward with their utility finances.
• Water and Sewer Cost of Service Study, Great Falls, MT - Project Manager.
Study included an analysis of the cost to serve each user class, development of
proposed modifications to the existing rate structure to improve equitability
and fairness, and a forecast of revenue adequacy for both utilities. In addition to
21,000+ customers and nearly 60,000 residents within the City, specific emphasis
was placed on the evaluation of cost to serve consecutive water and sewer users
(Malmstrom Air Force Base and the community of Black Eagle), as well as several
large water and wastewater intensive industries, including a crude oil refinery,
barley malting plant, and dairy processing facility.
• Water and Wastewater Rate Study, Billings, MT - Financial Analyst.
AE2S Nexus has performed Cost of Service and Revenue Adequacy
updates for the City since 2014. As the City has grown, the complexity
of the rate design has also increased, adding new wholesale users and
identifying equitable methods of distributing costs. These updates have
continued to refine and develop the City’s fiscal policies from how best
to identify and assign costs to incorporating impact fee accounting into
the overall process.
• Utility Financial Master Plan, Belgrade, MT - Financial Analyst. The
City of Belgrade retained AE2S Nexus to create a financial master plan to
guide the implementation of the utility plans. The financial master plan includes
financial evaluation of the utilities, water and sewer impact fee updates to account
for long-range impacts of growth planning, identifying cost of service to various
users (including one significant institutional user), evaluating potential for new
rate structures, and recommending rates for a 10-year period.existing dynamic
collection system model.
AE2S BOZEMAN UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS PROPOSAL A.4
RESUMES | A
Jacob Strombeck, PE Technical Support
Mr. Strombeck is AE2S’ Nexus Practice Leader and has over 10 years of experience with
civil and environmental engineering projects. In addition, he has provided risk analysis,
financial planning, and project development services for a variety of municipal and
private clients in the region. His experience also includes more traditional planning,
study, and design services.
EDUCATIONMaster of Science, Civil/Environmental Engineering, North Dakota State University; Bachelor of Science, Civil Engineering, North Dakota
State University
REGISTRATIONSProfessional Engineer: North Dakota, Minnesota, Florida
CONTACTJacob.Strombeck@ae2s.comT: 763-463-5036
C: 701-866-3808
WHY JACOB?Jacob’s financial acumen and comprehensive understanding of the rate update process will ensure your rates are fair, equitable, and defensible. He will bring consistency to your rate study and will draw on his experience managing similar rate studies.
SPECIFIC RELEVANT EXPERIENCE
• Wastewater Utility Rate Analysis, Owatonna, MN - Project Manager. Detailed cost
of service analysis, revenue adequacy model, review and updates to impact fees for
new developments, and exploration of new rate structures, and ordinance review.
Rate methodologies being explored included an inclining block structure to help
curb excessive peak system needs and to establish a more equitable rate for each user
class.
• Water System Financial Planning, Sioux Falls, SD - Project Engineer/Financial
Analyst. Redevelopment and update of the financial model for determining cost
share to the 20 members of the Lewis and Clark Regional Water System. The work
was completed for both the City of Sioux Falls and the Lewis and Clark Regional
Water System with the intent of using the model to determine final true-up for the
users as the project nears completion.
• Fargo and West Fargo Northwest Sewer and Water Service Study, Fargo, ND -
Project Manager. Regional planning study to determine sewer needs and methods
for servicing a portion of the northwest growth area including a regional sewer
service connection to the City of West Fargo. Project involved analyzing multiple
growth scenarios and sizing infrastructure to prepare for sustained future growth and
the potential for increased industrial users.
• Stormwater Utility Fee Study, Fargo, ND - Project Engineer/Financial Analyst.
Reviewed current stormwater utility fees and analyzed the cost assigned to
stormwater, with an emphasis on system operation and maintenance and capital
funding practices. Included a detailed revenue requirements forecast, fee structure
analysis, and integration of a parcel-based impervious surface fee structure
into the City’s utility billing database. The fee structure was tailored
to incentivize large landowners to reduce their local impacts to City
infrastructure. City ordinances were updated, a credit and exemption
policy was developed, and an extensive public outreach effort was used to
successfully deliver the project.
• Stormwater Utility Feasibility Study, Jamestown, ND - Project Engineer.
Analysis to determine the feasibility of establishing a stormwater utility to
fund the City’s stormwater management program, including the crafting of
a Strategic Communications Plan and accompanying material to convey the
project to stakeholders.
• Stormwater Utility Fee Study, Fargo, ND - Project Engineer/Financial Analyst.
Reviewed stormwater utility fees and analyzed the cost assigned to stormwater
with an emphasis on system operation and maintenance. Included an update of the
City’s existing stormwater management plan to comply with MS4 permit and State
Health Department requirements.
AE2S BOZEMAN UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS PROPOSAL A.5
RESUMES | A
Nikki Jabobi Water Lead
SPECIFIC RELEVANT EXPERIENCE
• Water and Water Reclamation Rate Study, Rapid City, SD - Financial Analyst.
Efforts consisted of rate design and revenue adequacy analyses, including detailed
funding scenario analyses addressing financing alternatives for the anticipated
construction of two new water treatment facilities and improvements to the
existing water reclamation facility.
• Water and Water Reclamation Rate Support, Sioux Falls, SD - Financial Analyst.
Annual analysis of the City’s Water and Water Reclamation Division expense and
revenue projections is completed as an assessment of revenue adequacy. This
evaluation incorporates anticipated growth rates based on recent trends in water
use and wastewater, strengthening the results in the projection of an appropriate
rate structure for the ensuing year. The analysis involves review and refinement
of the CIP, new and anticipated future debt service requirements, anticipated
operating expenses, reassessment of reserve funding goals, review of user class-
specific water sales and contributed strength loads, and projected cost recovery
and non-operating revenue trends.
• Water Rate Study, Watertown Municipal Utilities, Watertown, SD - Financial
Analyst. Cost of Service Analysis, Five-Year Revenue Adequacy Study, and
Rate Design to evaluate the existing rate structure to ensure rates are fair and
equitable for all users. Developed a rate plan for a financially self-sufficient water
utility, and developed reserve funding strategies.
• Water and Wastewater Utility Rate Study, Grand Rapids, MN -
Financial Analyst. Developed a comprehensive water and wastewater
rate study. Specific components of the study included Cost of Service
Analysis, revenue adequacy analysis, and development of rate design
alternatives. Specific emphasis was placed on development of a
conservation water rate structure and evaluation of the cost of providing
wastewater services to two customers outside the City limits. On-going
work includes a training seminar for staff on use of the rate models,
annual updates to the models, and preparation of recommended rate
adjustments on an annual basis.
• Water Utility Rate Study, Maple Grove, MN – Financial Analyst.
Faced with an aging system nearing significant reinvestment needs in the
coming years, the City of Maple Grove asked AE2S Nexus to help develop
a long-term capital reinvestment plan for their water utility and assist in
calculating rates that will fund these activities into the future. The rate study
included a revenue requirements forecasting analysis, connection fee cost-
basis evaluation, revenue adequacy and rate design analysis, and document of
methodology and recommendations. Through this analysis, an informed design
of the utility rate structure was achieved and reserve targets for various Water
Utility funds were identified.
As a financial analyst, Ms. Jacobi has experience providing utility enterprises
with financial support, including cost of service, revenue adequacy, CIP planning,
funding development and administration, and rate design. She has experience
with utility financial analyses ranging from simple spreadsheets designed to
meet the needs of a small system (with generally homogeneous user classes),
to complex models created to address the specific complexities associated with
larger systems.
EDUCATION
Bachelor of Business
Administration with Major in
Marketing, University of North
Dakota
REGISTRATIONS
MSRB Series 50 Qualified
Municipal Advisor
Representative
CONTACT
Nikki.Jabobi@ae2s.com
T: 701-746-8087
WHY NIKKI?
Nikki has completed
numerous rate studies for both
municipalities and water districts.
Her wide range of experience
will offer new perspectives and
creative alternatives to achieve
your water and wastewater
system goals.
AE2S BOZEMAN UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS PROPOSAL A.6
RESUMES | A
Dylan Walski Wastewater Lead
SPECIFIC RELEVANT EXPERIENCE
• Wastewater and Solid Waste Rate Study, Watertown, SD - Financial Analyst.
Evaluation of the current cost of service for the wastewater and solid waste utilities.
As the work progresses, the focus is making sure that structural changes to the
community don’t alter the right mix of rates. In the end, rate increases will be
recommended to ensure reserves and future capital needs are fully funded.
• Red River Valley Water Supply Project Financial Plan, Carrington, ND -
Financial Analyst. The RRVWSP is an approximately $1B supplemental water
supply project which plans to deliver water to Central and Eastern ND, serving 36
individual water systems that provide service to nearly half of the State of North
Dakota’s population. AE2S Nexus is leading the charge to develop the overall financial
plan for the project. The financial plan includes many unique components, including
development of comprehensive system revenue requirements forecast for the life
of the project (capital, O&M, administrative, long-term project renewal, etc.). The
life cycle renewal and replacement forecasting model included an analysis of all
project assets considering acquisition, long-term renewal, and disposal costs based
on statistical survival rate curves by asset type, i.e., pipelines, masonry, mechanical,
electrical, controls.
• Utility Rate Study, West Fargo, ND - Financial Analyst. West Fargo is
a growing community with growing needs in their utility infrastructure.
Assisted the City of West Fargo with understanding how the growth (as well as
regionalization within their utility services) leads to changes in funding utility
operations and how to fund those changes. The approach was complicated as the
City looks to right-size their infrastructure funding policies and how they
balance reinvestment in capital for established neighborhoods with new
capital on the fringe. Overall, the City is now on a more sustainable
path forward with their utility finances.
• Solid Waste Utility Rate Study, Fargo, ND - Financial Analyst.
As the City of Fargo looked to standardize its utility rate setting tools
across all of their utilities, they retained AE2S Nexus to create a robust
rate model and provide insights into rate setting for the next few years.
The model included a new approach to reserving for capital expenditures,
both large and small, along with a light cost of service analysis to better
determine if rates were appropriate for each user class.
• Water and Wastewater Rate Study, Billings, MT - Financial Analyst.
AE2S Nexus has performed Cost of Service and Revenue Adequacy
updates for the City since 2014. As the City has grown, the complexity
of the rate design has also increased, adding new wholesale users and
identifying equitable methods of distributing costs. These updates have
continued to refine and develop the City’s fiscal policies from how best to
identify and assign costs to incorporating impact fee accounting into the
overall process.
Mr. Walski has extensive experience managing portfolios of clients, and is adept at
assisting them to best meet their financial needs. He provides analysis for utility rate
studies, revenue requirements, cost of service, funding programs, and the AE2S Annual
Utility Rate Survey.
EDUCATION
Bachelor of Business
Administration, University of
North Dakota
CONTACT
Dylan.Walski@ae2s.com
T: 701-746-8087
WHY DYLAN?
Dylan has strong financial
analysis skills and has
experience with utility rate
studies, revenue requirements,
and funding programs.
AE2S BOZEMAN UTILITY RATE CONSULTING AND FINANCIAL ANALYSIS PROPOSAL A.7
RESUMES | A
Kayla Mehrens Stormwater Lead
SPECIFIC RELEVANT EXPERIENCE
• Gallatin Valley Water and Wastewater Regionalization Project, Gallatin County, MT
- Project Manager. Grappling with water supply and wastewater treatment challenges to
accommodate rapid community growth, a group of three authorities in Southwest Montana
hired AE2S to assess the feasibility of a utility regionalization project to help chart a more
sustainable future. Kayla led the execution of the project’s wide-ranging scope, including
analyzing environmental benefits, assessing water supply availability, and coordinating the
conceptualization of several billion dollars’ worth of water and wastewater infrastructure. A
key component of this project was developing planning-level cost estimates and formulating
governance, funding, and financial strategies for a project that, if constructed, would become a
multi-generational effort surpassing the largest public works projects completed in Montana to
date in cost, complexity, and scale.
• *Stormwater Utility Development and Management, Bozeman, MT - Program
Manager. Faced with a growing need to manage its extensive list of stormwater system
deficiencies, regulatory violations, and water quality challenges, the City of Bozeman
hired Kayla to lead the formation and management of its newly created Stormwater
Utility. Over time, she grew the program from a decentralized structure spread across
several divisions with an annual budget of $200,000 into a centralized $1.8 million per
year utility. Her work included wide-ranging components, from policy development,
operations oversight, project management, public engagement, and financial system
development. Her work resulted in measurable progress toward the City’s level of
service goals, and developed a sustainable program that is still in effective operation
today.
• Financial Planning Services, Missoula, MT - Project Manager. Seeing the need
to improve its Capital Improvement Planning (CIP) and financial forecasting
process for its water, wastewater, stormwater, and transportation utilities, the City
of Missoula hired AE2S to evolve its internal process from a pro forma method to a
more informed and data-driven approach. Kayla worked with the client to organize
and onboard their project and financial data into AE2S’s OptX software, allowing
them to manage and update their information more effectively. Further, Kayla’s
work now provides the client the ability to forecast varying growth and funding
scenarios, allowing them to align projects with funding in a more predictive and agile
manner.
• Funding and Financial Services, Estes Park, CO - Funding Lead. Confronted by
several miles of failing water pipes needing replacement, inflated construction costs,
and tight timelines, Estes Park hired AE2S to complete the design and construction
oversight of a sizable water distribution project. Kayla’s focus for the project was to
help the client unravel the complex funding and financial puzzle within state and
federal funding agencies, such as the United States Department of Agriculture (USDA)
and State Revolving Funds (SRF). A priority was to maximize the level of grants and
loan forgiveness (i.e., free money) to take advantage of the surplus dollars provided
to states through the Bipartisan Infrastructure Law (BIL). Kayla advocated on Estes
Park’s behalf and managed a detailed process of securing them the best deal to meet their
unique priorities, including project timeline, reduced local contributions, and minimal
administrative overhead.
Ms. Mehrens brings a broad range of public infrastructure, asset management, funding,
environmental compliance, and project management experience to the AE2S team. She
serves public-sector clients across AE2S’s geographies, linking practical financial solutions
to project needs, and managing infrastructure projects across the utility spectrum.
EDUCATION
Bachelor of Science, Earth
Sciences, Montana State
University
CONTACT
Kayla.Mehrens@ae2s.com
T: 406-219-2633
C: 406-595-0524
WHY KAYLA?
With Kayla’s stormwater
expertise, the City can
anticipate accurate stormwater
management costs, optimize
resource allocation, and ensure
fair and equitable billing for
both residential and commercial
stakeholders. She will provide
actionable insights to enhance
your stormwater management
strategies.
* Denotes experience prior to joining AE2S.
B | ADDITIONAL RESOURCES:
SAMPLE WHITE PAPER
January 10, 2020
Page 1 of 33
ABSTRACT
Water system resources are increasingly stretched thin as capital costs rise, grant funding recedes,
climate conditions pose source and quality challenges, economic pressures on users complicate the
balance of full cost recovery and affordability, and all while system infrastructure is aging. As a result,
water systems must adopt and implement policies and practices that promote well-managed and
operated water systems, both physically and financially. Depreciation, though considered a paper
transaction, represents a real cost that is at the core of one of the most critical discussions for water
system sustainability. Though not a silver bullet, depreciation can be used to help system managers
plan for reinvesting in a manner that ensures the system will be around for decades to come.
Depreciation is a familiar concept for accountants and tax professionals. For most water systems,
depreciation appears as a line item in annual audits and financial statements but is not always well
understood as it does not require a cash payment in the year it is recorded. In general, depreciation is
intended to represent the orderly allocation of the cost of a capital asset over its useful life. As opposed
to treating the entire purchase cost of the asset as a one-year expenditure, depreciation can represent
the annual cost of utilizing the asset each year it is in service. This concept provides a basis for
recovering the cost of system capital assets specifically from those benefitting from such assets.
There are two common trains of thought associated with depreciation and its purpose: 1) recovery of
initial investment of an asset, and 2) setting aside funds for replacement of that asset. While the former
is the textbook definition of depreciation, the latter can be the foundation of a proactive financial
management strategy that supports sustainability of the system. The intent of this paper is to provide
guidance and tools that water systems can use to enhance system renewal/replacement and general
capital planning by applying an understanding of system depreciation. This document explains the basis
for depreciation as applied within water system financial reports, summarizes depreciation methods and
how they can relate to capital planning, and describes how to implement depreciation-based values into
budget and reserve planning efforts.
WATER SYSTEM DEPRECIATION:
A CAPITAL PLANNING TOOL FOR THE WELL-MANAGED UTILITY
January 10, 2020
Page 2 of 33
WHITE PAPER OUTLINE
PROBLEM STATEMENT
PART 1: DEPRECIATION AND FINANCIAL REPORTING
• Understanding Depreciation
• Important Definitions
• Depreciation Methods
• A Component of Required Financial Planning
• What Financial Statement Components Do and Don’t Say About Your System
• Summary of Depreciation and Financial Reporting
PART 2: DEPRECIATION AND PRACTICAL SYSTEM MANAGEMENT CONSIDERATIONS
• Financial versus Managerial Goals
• Depreciation and System Value
• Capital Asset Consumption is a Real Expense
• Depreciation-Based Capital Reserve Planning Strategies
• The Role of Depreciation in Rate Setting
• The Role of Depreciation in Rate Equity
• Summary of Depreciation and Practical System Management Considerations
PART 3: SPECIAL TOPICS
• Donated or Grant-Funded Capital
• Better Matching Depreciation with Actual Asset Life
• Life Cycle Cost Analysis
• General Reserve Planning Guidelines
• Summary of Special Topics
PART 4: CONCLUSION
• Use of Depreciation by the Well-Operated System
• Establishing a Road Map for Capital Planning
ATTACHMENTS:
1. List of Typical Capital Asset Lives
2. Capital Asset Inventory
3. Capital Improvements Plan
4. Estimated Future Annual Debt Principal Payments
5. Existing Debt Principal Payments
6. Estimated Annual Contribution to Renewal/Replacement Capital Reserves
7. Capital Asset Renewal/Replacement
January 10, 2020
Page 3 of 33
PROBLEM STATEMENT:
HOW CAN DEPRECIATION EXPENSE FIT INTO A PRACTICAL PLAN FOR SYSTEM REPLACEMENT?
Rural and municipal water systems alike struggle to balance prudent financial planning with maintaining
affordable and competitive rates. The industry is making progress, however, as decision-making groups
are discussing reserve planning and capital asset management strategies. The discussion often involves
the challenge of “funding depreciation”. Utilities are faced with determining what “funding
depreciation” means and how to apply it. To the extent that depreciation represents the portion of
system capital that is “used up” every year, the inclusion of depreciation as a component of overall
revenue requirements is essential to keeping the system in consistent working order and to maintain its
worth.
As explained in this four-part paper, “funding depreciation” is a significant step in developing a
comprehensive plan for physical and financial sustainability. Part 1 of this paper explains depreciation
from an accounting perspective and Part 2 discusses depreciation in terms of system renewal on from a
system management perspective. Part 3 contains discussions of special circumstances where treatment
of depreciation can be particularly complicated, and Part 4 provides guidance on utilizing the
depreciation concept in promoting sustainable water systems.
January 10, 2020
Page 4 of 33
PART 1: DEPRECIATION AND FINANCIAL REPORTING
UNDERSTANDING DEPRECIATION
Before tackling how utilities can use depreciation as a tool within an overall plan promoting
sustainability, it is important to understand what depreciation is and how/why it is calculated. This
section of the paper defines depreciation, summarizes depreciation methodologies, and provides
additional important definitions.
What is Depreciation? Figure 1 provides a snapshot of a statement of revenues, expenses and net
position, referred to as the Income Statement, from a financial report for a fictitious rural water system.
The income statement is similar to the budget in that it reports actual revenue and expenses, but
whereas a budget accounts for debt service obligations and capital reinvestment, the income statement
reports depreciation and amortization. The Income Statement contains a two-year comparison of
operating revenues, and operating expenses, including depreciation and amortization. Depreciation and
amortization are similar concepts that can be confusing and are described below.
Table 1: Example Income Statement
OPERATING INCOME 2018 2017
Metered Sales to Customers $4,687,500 $4,500,000
Membership $55,000 $20,000
Other $130,000 $125,000
Total Operating Revenues $4,872,500 $4,645,000
OPERATING EXPENSES 2018 2017
Purchase of Water $1,280,000 $1,241,600
Maintenance $480,000 $510,000
Administrative and General $1,560,000 $1,528,800
Communications $40,000 $40,000
Utilities $110,000 $108,000
Transportation $45,000 $45,000
Depreciation $644,575 $647,355
Amortization $210,000 $210,000
Other Expenses $4,900 $5,000
Total Operating Expenses $4,347,475 $4,335,755
NET OPERATING INCOME 2018 2017
Net Operating Income $498,025 $309,245
NONOPERATING REVENUES (EXPENSES) 2018 2017
Interest Income $65,000 $61,000
Interest Expense ($159,600) ($161,196)
Gain (loss) on Sale of Assets $12,000 ($3,600)
Total Nonoperating ($82,600) ($103,796)
CHANGE IN NET POSITION 2018 2017
Change in Net Position $415,425 $205,449
January 10, 2020
Page 5 of 33
Depreciation is defined by the Internal Revenue Service as “the systematic and rational allocation of the
acquisition cost of an asset, less its estimated salvage or residual value, over the asset's estimated useful
life.” 1 From an operational viewpoint, agencies such as the National Association of Regulated Utilities
and the Federal Energy Regulatory Commission refer to depreciation as the “loss in service value of an
asset not restored by current maintenance.” The practice of depreciating capital assets is a means of
accounting for the cost of purchasing fixed assets over the entire useful life rather than only in the year
of purchase. When an asset having a useful life of greater than one year is purchased, the expense
associated with that asset is capitalized, and subsequently depreciated if it has a defined useful life (land
is an inexhaustible asset and is typically not depreciated). The capitalization and depreciation of costs
associated with purchase of an asset normalizes the cost by spreading it over useful life.
Whereas depreciation is associated with the loss in value of tangible assets, amortization as it applies to
the financial statement is a similar concept but applied to non-tangible assets. Amortization represents
the loss in value of items such as water rights, long-term water sales contracts, and other non-physical
utility assets and is typically not funded.
From an accounting standpoint, depreciation plays a role in determining net income, calculating taxes
due (for private utilities), establishing credit standing, etc. From a public utility operations standpoint,
the concept of allocating capital asset value over an extended period as opposed to expensing it in the
year of purchase is useful in rate-setting. Ideally, including annual depreciation as a revenue
requirement results in the recovery of the capital asset value depleted in each year of service from the
customers responsible for the portion of asset depletion in that year. As a result, depreciation plays an
important role in three key areas: 1) conformance with required accounting standards, 2) utility asset
management, and 3) equitable rate-setting. The first two are addressed in the remainder of this paper.
The third is discussed in brief but is a topic worthy of its own paper and is not covered in the detail
warranted herein.
1 Internal Revenue Service Manual Part 1, 1.35.6 Property and Equipment Accounting, 1.35.6.5 (07-26-2016).
January 10, 2020
Page 6 of 33
IMPORTANT DEFINITIONS
There are a number of methods to calculating depreciation.
Before that discussion, however, it is helpful to review some related terms:
Amortization: allocation of the cost of an intangible
asset over the expected life of the asset.
Assets: Property, including cash, reserves and
property/equipment owned by the Utility that can be
converted to cash.
Balance Sheet: A statement of financial position that
shows what is owed to others and the net asset value.
Book Value: The cost of the asset less accumulated
depreciation.
Capital Asset: Infrastructure that will provide benefit
now as well as into the future and has been converted
from cash or debt proceeds to a physical asset with
value approximately equal to the converted cash/debt
proceeds.
Capitalization: An asset exchange involving the
conversion of cash or debt proceeds to a physical
capital asset which is then depreciated.
Depreciated Asset/System Value: The original cost less
accumulated depreciation. Also referred to as Book
Value.
Depreciation: A method of accounting for the cost of
purchasing fixed assets over the useful life of the asset,
rather than only in the year of purchase.
Equity: The net value of system assets, or the value
less depreciation.
Inexhaustible Assets: Assets with no limit on useful
life that are not depreciated (such as land and land
improvements).
Intangible Asset: Assets that do not have a physical
presence and are not capitalized. Examples include
contracts, software. The value of such assets can be
amortized.
Liability: Amount owed to others.
Net Asset Value: The total asset value less
depreciation.
Net Salvage Value: The value of an asset at the end of
its fully-depreciated life less disposal costs.
Original Cost: The cost of the capital asset at the time it
was originally placed in service.
Present Value: The value of an asset in a future year
expressed in terms of the current year, disregarding the
effects of inflation.
Renewal/Replacement: The replacement or
refurbishment of a capital asset with a new asset
capable of meeting service demands of replaced asset;
can be rehabilitation of an existing capital asset that
extends the useful like.
Reserves: Funds available to meet cash needs (short-
term or long-term).
Revenue Requirements: Annual expenses and costs
incurred in providing water utility service. This
generally includes operation and maintenance
expenses, interest payments on debt, cash-funded
capital, principal payments on debt, and contributions
to reserves.
Salvage Value: The estimated amount that is expected
be received for an asset at the end of its useful life.
Sustainability: In water system operational terms, the
ability to maintain a level of service of consistent
quality, including meeting regulatory requirements, and
quantity by completing routine maintenance and
reinvestment at a pace designed to maintain system
operational ability over the long term. In financial
terms, the ability of a system to annually meet
operational, maintenance, and capital
investment/reinvestment needs by generating
revenues sufficient to meet the short- and long-term
expenditures required to maintain consistent
operational ability.
Undercapitalized: The situation in which investment or
reinvestment does not keep up with or exceed the rate
at which system capital assets are depreciating or the
rate at which it has been determined by some other
means that the system needs to reinvest to maintain
sustainability.
Useful/Service Life: A time period over which the
capital asset can be expected to operate, expressed in
months or years.
January 10, 2020
Page 7 of 33
DEPRECIATION METHODS
Records of capital asset value and depreciation are very important for both financial reporting purposes
and for capital asset management. Depreciation is most commonly calculated using one of four
methods, all of which are based on the original cost and do not account for the effects of inflation. Table
2 summarizes typical useful lives for capital assets as used in depreciation calculations for financial
reporting purposes. The straight-line depreciation percentage value is also shown and is simply the
inverse of the expected service life. For practical purposes, small similar capital assets, such as meters,
are commonly grouped and treated as one asset. For grouped capital assets, service life is estimated
based on the average of all components.
In addition to grouped capital assets, sometimes an entire water system will be treated as one capital
asset. This is often the case when a system does not have detailed asset records dating back to initial
system startup or any detailed asset records at all. In such cases, system depreciation can be estimated
on a capital asset group- or whole system-basis using a composite depreciation percentage. Values from
the literature indicate that typical percentages range from 2.0 to 2.5 for a complete water system
providing both treatment and distribution and slightly less at 1.7 to 2.0 for a purchased water system.
Attachment 1 to this document provides guidelines for typical useful lives according to a more detailed
water system capital asset list. Table 3 provides a description for each of the four methods and the
formulas for calculating depreciation. Table 4 summarizes the appropriateness of each method for
various asset types, along with advantages and disadvantages.
Table 2: Typical Expected Lives and Depreciation Percentage Applied in Accounting
TYPICAL EXPECTED LIVES - ACCOUNTING
EXPECTED
SERVICE LIFE
DEPRECIATION
VALUES
Structures & Improvements 20-50 Years 2.0% - 5.0%
Electric Pumping Equipment 20 Years 5.0%
Distribution Reservoirs 50 Years 2.0%
Water Mains 75 Years 1.3%
Meters 20 Years 5.0%
Office Furniture & Equipment 5 Years 20.0%
Tools & Shop Equipment 5 Years 20.0%
Vehicles 5-10 Years 10.0% - 20.0%
Complete Water System (Composite Rate) 40-50 Years 2.0% – 2.5%
Purchased Water System (Composite Rate) 50-60 Years 1.7% - 2.0%
January 10, 2020
Page 8 of 33
Table 3: Summary of Depreciation Methods
Depreciation Method Description Calculation
1. Straight-Line
The simplest and most common method of
calculating depreciation. Under this approach, the
annual depreciation charge is the same for each year
of useful life for the asset. This is the default
approach for utilities but does not necessarily reflect
the actual decline in use of every type of asset.
𝑂𝑟𝑖𝑎𝑖𝑙𝑎𝑙 𝐵𝑙𝑟𝑟−𝑆𝑎𝑙𝑟𝑎𝑎𝑎 𝑈𝑎𝑙𝑟𝑎
𝑈𝑟𝑎𝑎𝑟𝑙 𝐿𝑖𝑎𝑎
2. Units of Production
Depreciates based upon the number of units
produced/used compared to the estimated total life
in units.
# 𝑙𝑎 𝑈𝑙𝑖𝑟𝑟 𝑂𝑟𝑙𝑎𝑟𝑎𝑎𝑎
𝐿𝑖𝑎𝑎 𝑖𝑙 # 𝑙𝑎 𝑈𝑙𝑖𝑟𝑟× (𝐵𝑙𝑟𝑟−𝑆𝑎𝑙𝑟𝑎𝑎𝑎 𝑈𝑎𝑙𝑟𝑎)
Accelerated Methods:
3. Double-Declining Balance
and
4. Sum of Years Digits
Accelerated depreciation methods to recognize a
higher utilization at the beginning of the asset’s life.
They are most commonly used by private utilities for
tax determination purposes and are not commonly
used by public utilities.
𝐵𝑙𝑟𝑎𝑙𝑎 𝐵𝑎𝑎𝑙𝑖𝑙𝑖𝑙𝑎 𝐵𝑎𝑙𝑎𝑙𝑎𝑎:
𝑂𝑟𝑖𝑎𝑖𝑙𝑎𝑙 𝐵𝑙𝑟𝑟−𝑆𝑎𝑙𝑟𝑎𝑎𝑎 𝑈𝑎𝑙𝑟𝑎
𝑈𝑟𝑎𝑎𝑟𝑙 𝐿𝑖𝑎𝑎× 2
𝑆𝑟𝑙 𝑙𝑎 𝑌𝑎𝑎𝑟𝑟 𝐵𝑖𝑎𝑖𝑟𝑟:
𝑆𝑎𝑟𝑟𝑖𝑎𝑎 𝑙𝑖𝑎𝑎−𝑌𝑎𝑎𝑟 𝑙𝑎 𝑆𝑎𝑟𝑟𝑖𝑎𝑎+1
Sum of Years of Service
Modification: Condition-
Based Approach
Uses the physical characteristics of the asset to
estimate remaining useful life.
Evaluate current condition and compare against
established condition benchmarks
Table 4: Applicability of Depreciation Methods
Method Applicability Best Application of Method Advantages Disadvantages
1. Straight-Line All capital
assets
Can be reasonably applied to most
assets unless there is evidence that
degradation of value is not uniform.
Simple, easy to understand,
results in stable annual
capital-related expense over
asset life
Not reflective of degradation for
all assets, assumes decline in
asset value is directly correlated
with time in service
2. Units of
Production
Capital assets
with
measurable
units
Appropriate for cases in which the
actual degradation of the asset is
tied to hours of usage (e.g.
pumps/motors) or miles driven
(vehicles).
More accurate for assets with
mileage or other units
attached to productivity
More complicated than straight-
line, reliant upon an accurate
estimate of total units
Accelerated
Methods:
3. Double-
Declining Balance
and
4. Sum of Years
Digits
All capital
assets
By assuming higher rates of decline
in early years as opposed to uniform
decline, approach may be more
reflective of actual use of certain
assets. However, the calculations
are still arbitrary and not tied to
actual asset condition. May be
unnecessarily cumbersome for
public utilities.
More accurate reflection of
asset’s productivity levels
throughout asset’s life
Projects larger expense
(depreciation) and in the
beginning of asset’s life, and
correspondingly may
underrepresent the net value.
Results in users early in asset life
paying a proportionally higher
share of asset cost.
Modification:
Condition-Based
Approach
Capital assets
that can be
regularly
physically
measured
A solid managerial approach that
that is focused on long-term
planning.
Provides an objective
measure of the position
within the asset’s life,
encourages greater asset
management, results are
useful in physical asset
management
Complicated to implement
January 10, 2020
Page 9 of 33
The best method of depreciation for a water system varies and depends upon the needs of the
individual system. Governmental accounting standards, introduced in the next section, allow the use of
traditional methods or the condition-based modified approach that accounts for preservation and
extension of useful life. Most systems use straight-line depreciation, which in some instances results in
over-estimation of annual depreciation due to common practices by utility managers and operators to
extend capital asset lives as long as possible. Often beyond expected life, this supports the Condition-
Based Approach that better accounts for actual asset condition. Although more labor-intensive, the
Condition-Based Approach can be a highly effective tool for overall utility management.
A COMPONENT OF REQUIRED FINANCIAL REPORTING
The General Accounting Standards Board (GASB) is an organization that sets generally accepted
accounting practices (GAAP) for state and local governments. It is important for water systems to follow
the established accounting practices to establish credit worthiness and generally demonstrate the
financial health of the system. In 1999, the GASB issued Statement No. 34, Basic Financial Statements
and Management’s Discussion and Analysis for State and Local Governments (GASB-34), which changed,
among other things, reporting requirements related to system investment. Under GASB-34, systems are
required to report the estimated value of capital investments, including depreciation. The goal of GASB-
34, as it relates to water utilities, is to increase the transparency of the financial condition. Not following
GAAP or GASB-34 reporting practices may have funding repercussions, such as the ability to obtain
funding from the Drinking Water State Revolving Fund and similar programs for which systems are
required to demonstrate an ability to repay the loans. Related pronouncements to GASB-34 have also
been issued but are not discussed herein.
GASB-34 requires that public water systems utilize an accrual method of accounting, in which expenses
and revenues are recorded at the time they are incurred, rather than on a cash-flow basis. The
difference between these two methods of accounting and financial reporting can be illustrated in terms
of a water bill: on an accrual basis, the revenue associated with a water bill is booked at the time the bill
is generated, or the time the income is earned; on a cash basis, the revenue is booked at the time it is
received, typically 10 to 15 days after the bill is generated. Table 5 provides a comparison of accrual-
and cash-basis accounting.
Table 5: Basic Differences between Accrual-Based and Cash-Based Accounting Practices
ACCRUAL-BASED ACCOUNTING CASH-BASED ACCOUNTING
Level of Effort: Complicated Simple
Timing of Expenditure: At time it is incurred At time cash is paid out
Timing of Revenue: At time revenue is earned At time revenue is received
GAAP: Recommended Not Recommended
While depreciation is a required reporting component per GASB-34, it has been argued that
depreciation is not necessarily a good reflection of system reinvestment needs. One line of reasoning
notes that public utilities are in the habit of routinely performing major maintenance, thereby
maintaining the value of the capital assets. In this case depreciation would have less relevance than the
January 10, 2020
Page 10 of 33
actual expenditures on system renewal and replacement. On the other hand, it has also been noted
that if a system is not annually reinvesting in its capital assets, reporting depreciation on the financial
statement does not necessarily indicate what could be a potentially deteriorating condition of the
system. To allow flexibility, GASB-34 allows systems to utilize either the traditional approach of
reporting total capital asset value and depreciation or a modified approach that focuses on actual capital
reinvestment. The latter requires detailed capital planning for budget purposes, funding development,
and rate-setting purposes but results in an overall better approach by focusing on recording the annual
cost of maintaining infrastructure, essentially promoting sustainability.
The modified approach is a more accurate reflection of how the system is managed and maintained but
requires a rigorous asset management program that covers all system capital assets and regular
condition assessments that drive the development of capital planning values. The modified approach
requires documentation that capital assets are being preserved at or above established levels of
conditions and specifically requires:
• Maintenance of an up-to-date inventory of eligible capital assets;
• Identification of annual cost of maintaining capital assets;
• Condition Assessment (every three years); and
• Comprehensive documentation and record-keeping.
The Modified approach can be an important component to an overall capital planning approach that
recognizes the fact that system managers and decision makers are more concerned about the cost of
maintaining and replacing infrastructure than simply how much system value has been depleted
(depreciated). Nonetheless, the traditional concept of depreciation does merit a good understanding by
utility managers.
WHAT FINANCIAL STATEMENT COMPONENTS DO AND DON’T SAY ABOUT YOUR SYSTEM
The intent of the GASB-34 financial reporting requirements is to provide a more transparent view of
utility financial health. A utility that is not keeping up with capital asset replacement will see declining
depreciated asset values as well as total annual depreciation values over time as system components
reach their assumed useful lives. A utility that is actively reinvesting will see increasing or relatively
steady depreciation values.
But depreciation alone does not tell the whole story, as it does not indicate the value of system
investment. Another component of the required financial reporting is the Balance Sheet, which is a
statement of financial condition representing liabilities and net asset value to determine total asset
value. Among the net assets reported in the Balance Sheet are Fixed Capital Assets – property, plant
and equipment used in daily utility operations. The Balance Sheet also lists, among other things, Cash
and Cash Equivalents (cash available within 90 days) and Long-Term Investments (assets requiring more
than one year to be converted to cash). Table 6 gives some general guidance as to how year-to-year
changes in key Balance Sheet values can indicate the financial health of a system. Note that the
examples in Table 6 are simplified generalizations meant to help understand the relationship between
the Balance Sheet entries. In practice, there may be exceptions.
January 10, 2020
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Table 6: General Balance Sheet Trends
ASSUMES: ANNUAL REVENUE AND O&M EXPENSE (EXCLUDING DEPRECIATION) REMAIN UNCHANGED
CAPITAL ASSETS LESS
DEPRECIATION TO DATE
CASH & CASH
EQUIVALENTS
LONG-TERM
INVESTMENTS
POTENTIAL
EXPLANATION
POTENTIAL IMPACT TO
FINANCIAL HEALTH
Decreasing Increasing Steady or
Increasing
Not investing in
system;
potentially
funding capital
reserves
OK if funding
reserves; Negative if
not funding reserves
or if recurring trend
Decreasing Steady or
Decreasing
Steady or
Decreasing
Not investing in
system; Not
funding capital
reserves
Negative if repeated
over time
Increasing or Steady Steady or
Decreasing
Steady or
Decreasing
System
investment is
being made with
rate revenue
and/or
Cash/Reserves
Positive
Regarding the far left column in Table 6, capital assets can be listed either as net of depreciation,
referred to as Book Value, or in full with depreciation shown as a deduction. The book value from one
year to the next will change based on capital investment. Ideally, a system will be reinvesting annually
at a level equal to or exceeding depreciation, in which case the capital asset value will remain relatively
stable or will increase. If the capital asset value is consistently decreasing over time, it may be that the
system is undercapitalized, or not reinvesting at a rate that promotes sustainability, with potential
negative impacts to the financial health of the system (far right column in Table 6). This is not
necessarily bad if the utility choses to approach system reinvestment through large periodic projects
instead of annual reinvestment but is generally not a sign of good capital asset management.
January 10, 2020
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SUMMARY OF DEPRECIATION AND FINANCIAL REPORTING
Part 1 of this report introduced the financial terms most often encountered by water systems to help
systems understand what they mean, why depreciation matters to a water system, how to calculate
depreciation, and what depreciation and other components of required financial reporting can say
about financial health. Important takeaways from Part 1 include the following:
• Depreciation is generally defined two related but different ways depending upon perspective:
o The allocation of an asset’s cost (less salvage value) over its intended useful life
(accounting perspective); and
o The annual loss in service value not restored by current maintenance (operational
perspective).
• The GASB Statement 34 and subsequent related pronouncements were developed to increase
transparency in financial reporting for public water systems.
• Under GASB-34, public water systems are required to utilize accrual accounting, calculate
depreciation on capital assets and include depreciation and system values in financial reporting.
Failure to do so can have funding repercussions.
• Multiple methods can be used to calculate depreciation:
o Straight-Line: Simple and most commonly used, but generally not a good representation
of declining infrastructure service level.
o Units of Production: Appropriate for capital assets for which wear and tear can be
linked to usage (vehicles based on miles driven, pumps based on runtime hours, etc).
o Accelerated Methods: Not generally used by public utilities.
o Condition-Based Approach: Based on asset management principles, this involves
periodic evaluation of physical asset condition and detailed record-keeping. While the
most time-intensive method of those discussed herein, this provides the most realistic
value of annual capital asset degradation and is therefore a more useful measurement
for required reinvestment than traditional depreciation.
• It is important for water system managers to understand the annual depreciation values for
capital assets and how they were derived. Understanding the method used, managers can
utilize depreciation values or modify those values for use in capital planning.
• It is a good idea to become familiar with annual financial reports. Compare net asset values
from one year to the next and understand the reason for fluctuating values so as to explain the
results if necessary.
It has been established that systems are required to report depreciation on all capital assets along with
depreciated system value. As required by GASB-34, depreciation appears as an expense in the income
statement (see Table 1). Where does it go from there? Ideally it is a cash transfer to a reserve account
to be used for reinvestment in the system, but that is not always the case. Part 2 of this document
addresses why it is important (and how) to convert depreciation values to a real expense to the benefit
of system sustainability.
January 10, 2020
Page 13 of 33
PART 2: DEPRECIATION AND PRACTICAL
SYSTEM MANAGEMENT CONSIDERATIONS
Depreciation in its traditional form serves an important financial reporting need but does not necessarily
support best practices for promoting and maintaining physical and financial system sustainability. The
primary objections to the use of depreciation in financial reporting by water systems have to do with 1)
oversimplified approach to a capital asset’s useful life and 2) basis on original cost of the capital asset,
both of which lead potential differences between the depreciated value and the asset’s replacement
cost. The conclusion can thus be made that strictly funding depreciation is not the most appropriate
approach to planning for capital renewal/replacement. The follow-up to that statement is that
depreciation values can be useful in gauging the magnitude of future replacement needs. This portion
(Part 2) of the document outlines how depreciation can play a role in developing a practical approach to
capital replacement.
FINANCIAL VERSUS MANAGERIAL GOALS
One of the difficulties with the concept of depreciation has to do with the difference between classic
Financial and Managerial perspectives. Financial statements based on accounting standards do not
always provide system managers with capital asset information in its most useful form. System
managers and decision makers are interested in capital asset replacement cost more so than
depreciated value of assets as the traditionally-calculated depreciated asset values typically do not align
with the actual condition of capital assets. Depreciation alone is simply not directly useful in terms of
system sustainability. By definition, depreciation is based on original cost and does not account for on-
going investment and routine maintenance geared toward extending the capital asset life. To allow
flexibility for systems to account for actual annual expenditures related to maintaining existing
infrastructure, GASB-34 allows for a modified approach based on condition assessment.
In the absence of a rigorous condition assessment practice, however, the usefulness of depreciation as a
measure of system reinvestment is high. When adjusted to reflect the time value of money associated
with future replacement costs, depreciation values can be extremely useful. Systems are well-served by
implementing practices that meet both financial reporting requirements and support the efforts of
system management to maintain system capital assets in a manner. This approach works to maximize
the useful life of infrastructure and translates to responsible management of system finances.
DEPRECIATION AND SYSTEM VALUE
When capital investment is made, the system converts one asset – either system cash or debt proceeds
– to a physical capital asset with a value presumably equal to the cash outlay. When cash or cash
reserves are utilized, the immediate value of system assets is essentially unchanged, the asset is just
represented differently on the financial statement. When debt is incurred to add a capital asset or
replace an asset, the system adds a liability. As the capital asset depreciates, it loses value, represented
by depreciation. Prudent financial planning involves compensating for that loss in value by directing a
revenue amount commensurate with the annual depreciation either into a capital reserve account for
future reinvestment or into completing system renewal, either through a cash investment or through
funding capital asset replacement debt. This approach is intended to maintain overall system value over
the long-term.
January 10, 2020
Page 14 of 33
By completing routine maintenance and periodic replacement, consistent quality and quantity levels of
water service to system users can be maintained. Although raising water rates is not easy, customers
expect service to be consistent and expect managers and decision makers to responsibly maintain and
preserve the value of the investment that has been made by the customer base. These often unspoken
expectations fit nicely with a strategy that routinely reinvests at a level meeting or exceeding annual
depreciation of the system.
CAPITAL ASSET CONSUMPTION IS A REAL EXPENSE
For a water system to provide water at reliable quality and service levels, the condition and value of the
system infrastructure must be maintained at a generally consistent level. Capital costs are normally
referred to as expenditures rather than expenses due to the long-term implications of capital assets and
association with system value. For the purpose of discussion herein, depreciation is considered a
capital-related expense. Depreciation represents consumption of a capital asset – the “cost” of using
that asset in a given year and thus should be treated as a real expense.
Consider the illustration in Figure 1, where the blue bars represent value of a water system over time in
current year dollars or absent of the effects of inflation. The original system value, in dark blue,
decreases over time due to depreciation while providing a consistent level of service throughout its
useful life. This is the depreciated value for the given year on the X axis. For that to happen, there are
periodic infusions of capital into the system – pump replacements, watermain replacements, etc.
Theoretically, these capital infusions occur annually and are equal to the portion of the system
depreciated annually. Due to the time value of money, straight-line depreciation does not adequately
cover the capital inflation cost; however, depreciation does provide an estimate of the system that has
been “used up” and is therefore represents a real expense when it comes to considering total revenue
requirements for any given year of operation. Depreciation can be used as a surrogate capital value
against which a system measures current rate-funded capital investment, debt service principal, and
planned deposits to capital reserves in a given year.
Figure 1: Present Worth Illustration of System Value
Asset
Value ($)
Time (Years)0 25
SYSTEM
REINVESTMENT/
PRINCIPAL
REPAYMENT
X Y
RESERVES
UNDEPRECIATED
SYSTEM VALUE
ORIGINAL
SYSTEM
VALUE
January 10, 2020
Page 15 of 33
Now consider the $500,000 capital asset with a 20-year life illustrated in Figure 2. If an annual cost index
of three percent is assumed, the replacement value of the capital asset at the end of its 20-year useful
life will be $375,753 more than the sum of accumulated depreciation on the asset. Assuming that
annual depreciation is deposited to capital reserves for future replacement, an annual interest rate of
7.2 percent throughout the 20-year period would be required to accumulate cash reserves equal to the
future end-of-life replacement value.
In terms of representing the full cost of service, including operating and use of capital, depreciation is
thus a real expense. The phrase “Pay me now or pay me later” is often used to describe the impact of
failing to fund depreciation only to arrive down the road at a series of catch-up replacement projects
requiring potentially unplanned capital funds. As a result, prudent capital planning accounts for not only
depreciation, but also the shortfall between the dashed line in Figure 2 and the top of the orange
portion of the bars.
Figure 2: Comparison of Accumulated Depreciation and Future Replacement Value
DEPRECIATION-BASED CAPITAL RESERVE PLANNING STRATEGIES
The illustration in Figure 2 shows that accumulated depreciation is not adequate to meet future
replacement value when the time value of money is taken into consideration. Ideally, a system would
know exactly when replacement would be required, exactly what it would cost, and exactly how many
users and how many gallons of water would be sold between now and the time of replacement, so user
fees could be perfectly dialed in to collect the revenue needed for the future expense. This is obviously
not practical.
$376,753
$-
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Asset Life
Shortfall
Accumulation Depreciation-Based System Reinvestment/Contribution to Reserves
Original System Value ($)
System Replacement Value
January 10, 2020
Page 16 of 33
To address the shortfall described in the previous section, best practices in capital asset management
involve planning for annual rate-funded renewal/replacement and/or deposits to capital reserves. The
right approach is specific to each utility based on capital funding philosophy, but under just about any
circumstance it is a best practice to ensure that annual rate-funded capital asset investment, capital
asset debt principal replacement, and/or contributions to capital asset reserves are at least equal to
annual depreciation values. This best practice supports the definition of depreciation as the estimated
cost of capital asset use and ensures that ratepayers are providing revenue reflective of the full cost of
service. Figure 3 illustrates this baseline reserve-planning concept.
Figure 3: Baseline Approach to Funding Capital Reserves
Tables 3 and 4 introduced depreciation methods from an accounting standpoint, including non-
traditional condition-based depreciation. Although the units of production and accelerated methods
may provide an estimate of annual system cost that more closely resembles actual cost, these methods
are not accepted under GASB-34 and are less useful than accounting for the actual replacement cost, so
are likely not useful to utility management. There are essentially three common approaches to consider
when planning annual contributions to a capital renewal/reserve fund. These approaches are listed
below, presented in Table 7 and explained individually in following paragraphs.
1. Straight-Line Depreciation: This is a good approach that aligns with a financial statement. If
accurate capital asset records are available, this is a simple way to plan for a portion of future
investment needs. However, it is most often inadequate to provide for full cost replacement.
Another way in which the accounting and managerial perspectives can differ is in the assumed
expected life of capital assets. If utilizing straight-line depreciation for capital planning, recall
the typical asset lives assumed for financial reporting shown in Table 2. Attachment A to this
paper contains a more detailed table with typical capital asset lives used by system managers
and engineers based on experiences within the industry. When planning for future
replacement, the values in Attachment A should be considered.
January 10, 2020
Page 17 of 33
2. Depreciated Replacement Cost: This approach is better than using annual depreciation as a
basis for reserve contributions as it results in reserve building that more closely matches future
reinvestment needs. This is likely not an accepted practice from an accounting standpoint but is
a more accurate approach to budgeting for actual replacement needs.
3. Condition-Based Depreciation: From a sustainability asset, this is the best approach to
proactively planning for system renewal needs but requires specific and detailed evaluation and
record-keeping to meet GASB standards. This approach is the best fit in terms of meeting
managerial goals of water systems. Not all capital assets may be eligible for this approach, or
the effort entailed for some may not be worth the outcome, and a combined approach may be
used. For financial reporting purposes, GASB-34 does allow different approaches for different
asset types.
The Straight-Line Depreciation and Depreciated Replacement Cost approaches are relatively
straightforward. Straight-Line depreciation involves equally dividing the original value of a capital asset
by the years of service to obtain the annual cost. Depreciated replacement cost involves estimating the
replacement cost at the end of useful life and then dividing the replacement cost by the expected years
of service to obtain the annual cost. When estimating future replacement, there are different levels of
effort that can be applied depending on the desired accuracy and cost the system can afford. The
increasing levels of accuracy/effort include but are not limited to utilization of: 1) Consumer Price Index
as annual indices, 2) construction sector cost indices, such as the Engineering News Record (ENR) or RS
Means, and 3) detailed system-specific design cost analysis. Straight-line depreciation meets financial
reporting requirements but incorporating the replacement cost is a better tool for estimating annual
capital cost from a management perspective.
The Condition-Based approach is labor-intensive but is much more reflective of actual capital needs.
Minimum requirements to meet GASB-34 using a condition-based approach include:
• Infrastructure condition assessments completed at least every three years;
• Documented description of criteria used to measure and report capital asset condition;
• Documentation of the intended condition level at which the capital asset will be maintained;
and
• Five-year estimates of the cost anticipated to maintain the capital asset at the intended
condition level.
While this paper is focused on depreciation and not condition assessment, it is worth mentioning that
there are several tools and methods, both direct and indirect, available to assist in evaluating system
condition and forecasting renewal needs. The more data that is available regarding items such as
pipeline breaks by age and materials, standard pump lives, frequency of filter rehabs for a given water
sources, etc., the more accurate the condition assessment will be.
January 10, 2020
Page 18 of 33
Table 7: Summary of Common Capital Reserve Planning Approaches
January 10, 2020
Page 19 of 33
THE ROLE OF DEPRECIATION IN RATE-SETTING
In the interest of financial responsibility, water system managers and decision makers place great
emphasis on controlling expenses. Minimizing expenses translates to savings for ratepayers. It is no
secret that industry-wide, systems face challenges related to full cost pricing due to general
misunderstanding of the value of water. As grant funding becomes increasingly scarce it is ever more
important to be sure that water rates are based on the true and total revenue requirements identified
to maintain system sustainability. This includes accounting for depreciation as a capital-based revenue
requirement or ensuring that total capital-based revenue requirements meet or exceed annual
depreciation. Figure 4 illustrates revenue requirements for rate-setting purposes, highlighting the
difference between cash-basis and utility-basis revenue requirements.
Figure 4: Rate Revenue Requirements – Cash Basis and Utility Basis
Rate-setting based on the cash-basis revenue requirements on the left includes actual expenditures for
debt service payments, capital investment, and deposits to reserves. Because it is comprehensive and
an actual reflection of planned capital investment, this approach is how utilities normally determine the
needed amount of rate revenue from year to year. From a rate-setting perspective, it is particularly
important to understand actual cash expenditures.
When considering rate revenue requirements on a utility-basis, it is important that the capital-related
revenue requirements on the right are adequate to match those on the left, unless the utility plans to
use accumulated reserve funds. As a result, to ignore depreciation as a revenue requirement would
have a negative impact on system sustainability, as resulting revenue would be inadequate, and the
system would not be able to reinvest in its infrastructure.
An additional consideration, addressed in Part 3 of this paper, is when a system has a significant value of
infrastructure that was funded by grants or other non-utility sources. The value of these capital assets
must be reflected in the depreciation value to avoid under-estimating the annual capital-related
revenue requirements. If all capital assets are not fully accounted for, systems may not be planning for
the long-term reinvestment in capital that wasn’t originally paid for by rate payers.
January 10, 2020
Page 20 of 33
THE ROLE OF DEPRECIATION IN RATE EQUITY
Another important consideration for accounting for depreciation as a measure of minimum contribution
to capital reserves can be made from a rate-setting perspective. Consider how depreciation promotes
generational equity, or the concept that each generation of system users should pay their fair share of
use of the infrastructure, regardless of its age or how it was originally funded. To achieve an equitable
rate structure, the portion of the system that is “used up” every year must be fairly charged to the
customers that “used it”. Further, to maintain consistent performance of the system to provide service
that is reliable both in terms of quantity and quality, system renewal should be ongoing, essentially at
the same pace as the system value is depleted. While that does not necessarily mean annual capital
expenditures must offset physical depreciation, it may; or it may mean investment into reserves to be
used at a future renewal trigger point.
For example, the reservoir in the Figure 5 is expected to perform at its intended level of service for 50
years. For each of those years, customers of the system receive a benefit from use of the reservoir,
regardless of its undepreciated value. As a result, the customer base each year should pay for one
fiftieth of the original value of the capital asset, ideally indexed to the current year, to both reflect the
replacement cost of the asset and properly represent the full cost of providing service in the current
year. Why one-fiftieth (1/50) of the cost indexed to the current year? Because that represents the
replacement cost for the portion of the asset used in the current year. This philosophy ensures that each
generation pays for its share of use of the system, regardless of outstanding debt owed or
undepreciated value, assuming the capital asset is properly maintained to perform at its intended level
of service. And this concept supports the straight-line depreciation method, with the caveat that
depreciation of original cost is inadequate for future replacement. This ultimately supports depreciated
future replacement cost as the front-runner for depreciation-based capital planning when the
development of condition-based assessment planning values are not an option.
Figure 5: Depreciation Illustration
January 10, 2020
Page 21 of 33
SUMMARY OF DEPRECIATION AND PRACTICAL SYSTEM MANAGEMENT CONSIDERATIONS
Part 2 of this report discussed the value and use of depreciation as a surrogate capital planning value
from a system management perspective. Important points are noted below.
• The objective of prudent capital planning is to identify the annual level of reinvestment required
to support a reliable, sustainable system.
• From a system management perspective, depreciation represents consumption of a capital
asset. While traditional depreciation is most often insufficient to represent the actual cost of
capital asset consumption due to its basis on original cost without accounting for the time value
of money, it can be a useful surrogate value for capital planning.
• Total rate revenue requirements consist of both O&M-related and Capital-related revenue
requirements. Depreciation is a capital-related revenue requirement in terms of utility-basis
revenue requirements and should not be overlooked. Ignoring depreciation as a revenue
requirement has a negative impact on system sustainability, as it does not provide adequate
revenue and as a result does not enable the system to reinvest in its infrastructure.
• Annual reinvestment through debt service principal, rate-funded capital and contributions to
reserves should, at a minimum, be equal to annual depreciation.
• When basing annual reinvestment on straight-line depreciation, managers are advised to
consider the useful lives included in the financial calculation and whether adjustment is
appropriate based on historical experience and current system knowledge.
• Capital reserve funding approaches based on straight-line depreciation versus condition
assessment are at opposite ends of the spectrum in terms of simplicity and accuracy. If
condition-based assessment is not an option, depreciated replacement value is a consideration
that will provide a better planning value for future capital needs.
• From a rate-setting perspective, the practice of funding depreciation, at a minimum, through
annual system renewal plays a role in maintaining generational equity.
January 10, 2020
Page 22 of 33
PART 3: SPECIAL TOPICS
DONATED OR GRANT-FUNDED CAPITAL
It is rare to find a system that is constructed entirely of capital assets paid for by user rates. For nearly
every system there are instances where capital assets have been donated or funded by grants, both
referred to as contributed capital. Regardless of funding mechanism, contributed capital assets are a
legitimate component of total recorded system value and should be considered when evaluating
reinvestment planning. While GASB-34 requires systems depreciate these capital assets, they are not
treated the same when used to establish an overall rate base for rate-setting (a topic outside the scope
of this paper). How best can we account for these capital assets when addressing renewal and
replacement funding? If depreciation is funded as a surrogate capital investment value, should the
users be charged for a capital asset for which they did not originally fund? This section will provide
discussion on the impacts of contributed capital in annual cost to ratepayers and system value to help
answer these questions.
If we think of depreciation as representing the value of the system that is consumed during one year of
operation, the rate revenue generated in that year should be sufficient to replace the portion of capital
consumed. Again, there are special considerations in rate-setting practices that address contributed
capital.
In terms of accounting for contributed capital within a reserve planning strategy, the next logical
question is: then how does the donation of a capital asset benefit the ratepayers if they are charged to
replace it? To answer this, we need to consider the fundamental purpose of prudent reserve planning,
which is to build and maintain utility finances at a sufficient level to meet ongoing renewal/replacement
needs for the entire system, including contributed components. The intent is to consistently invest
either through capital renewal/replacement or reserve funding to place the system in a position where
an eventual significant reinvestment need does not cause a staggering increase to ratepayers. The
following discussion illustrates how contributed capital provides the utility with the opportunity to
maintain system value.
IMPACT OF VARIED CAPITAL FUNDING OPTIONS TO THE RATEPAYERS AND SYSTEM VALUE
The financial impact of donated capital assets is compared with the financial impact of debt-funded
capital assets in Figures 6 and 7. Figure 6 represents depreciation on a $50,000 donated capital asset
with a 20-year life. The black portion of the bars illustrate the declining value of the capital asset and
the red portion illustrates cumulative depreciation. By the end of the 20-year useful life, the capital
asset is replaced at a greater cost ($87,675) than accumulated depreciation due to the time value of
money at an assumed three percent rate of inflation. If depreciation has been funded, ratepayers over
the 20-year period have theoretically been charged $2,500 annually for use of the capital asset, for a
cumulative cost of $50,000. If depreciation has not been funded over the 20-year period, the system is
back where it started, has not increased system value, and potentially undercharged the ratepayers in
the short-term only to most likely result in a need to charge them considerably more for replacement of
the “free” capital asset. The system will have lost the opportunity to maintain system value.
Figure 7 is an example of depreciation on the same $50,000 capital asset with a 20-year life, but
assuming the capital asset has been funded by debt (paying off a loan) rather than as a contribution or
January 10, 2020
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using grant funding. The capital asset value declines at the same rate as in Figure 6, but the red portion
of the bar in this case represents cumulative principal repayment made by the ratepayers, which totals
$50,000 over a 20-year loan payment equaling the life of the asset. The additional component in the
debt funding example is the gray portion of the bar, which represents cumulative interest paid (3
percent annually) over the life of the capital asset. Payments made by the ratepayers over the 20-year
period for debt service and interest would be approximately $3,360 per year.
The annual interest cost represents the savings to the ratepayers in the case of contributed capital
versus debt funding. After 20 years, if depreciation has been funded according to Figure 6, the utility
would have 57 percent of the cash needed to replace the capital asset (plus any earnings on that
balance). After paying off the debt in Figure 7, during which time depreciation would typically not be
funded so as not to charge the same ratepayers twice for the same capital asset, the utility would have
none of the cash needed to replace the capital asset and would likely issue debt again for that purpose.
In addition, the ratepayers would have been charged approximately $3,360 per year in the debt scenario
versus $2,500 per year.
Figure 6: Example of Depreciation of 20-Year Donated Capital Asset $50,000$47,500$45,000$42,500$40,000$37,500$35,000$32,500$30,000$27,500$25,000$22,500$20,000$17,500$15,000$12,500$10,000$7,500$5,000$2,500$87,675-$2,500-$5,000-$7,500-$10,000-$12,500-$15,000-$17,500-$20,000-$22,500-$25,000-$27,500-$30,000-$32,500-$35,000-$37,500-$40,000-$42,500-$45,000-$47,500-$50,000-$60,000
-$40,000
-$20,000
$0
$20,000
$40,000
$60,000
$80,000
$100,000
Example: $50,000 Donated Asset with 20-Year Life
Future Value
Asset Value Cumulative Depreciation
January 10, 2020
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Figure 7: Example of Debt-Funding of 20-Year Capital Asset
In these examples it is easy to see the benefit of contributed capital to the ratepayers, but what if the
system pays for the capital asset using rate revenue or cash reserves instead of receiving the asset as
contributed capital? Figure 8 presents a visual description of the impact on system value when
purchasing the $50,000 capital asset under contributed capital and cash-funded capital scenarios.
Assume the existing system value (including cash and the book value of capital assets) is $500,000. In
the contributed capital scenario, the value of the contributed asset is added to the existing system
value. In the cash-funded example, the use of cash to purchase the capital asset results in the
conversion of cash to a physical asset with an associated value. This asset exchange, illustrated in the
third bar in Figure 8, does not result in an increase in system value. That’s ok! The ability of the system
to use cash for the capital asset purchase results in interest cost savings to the customer base. Ideally,
the reserve cash used for the purchase has been acquired over a number of years by funding a
depreciation-based capital reserve by incorporating an annual reserve funding component into the rate
revenue requirements. By doing so, the utility can program periodic capital purchases/improvements
without creating the need for irregular and potentially significant rate spikes.
This is not to say that utilities should not utilize debt for funding reserves. For large infrastructure
projects, low-interest debt available to utilities is a good option in terms of overall financial planning and
rate-setting. But building a capital reserve that affords the utility the ability to cash-flow as much of its
programmed capital as possible is a hallmark of financial sustainability. $50,000$47,500$45,000$42,500$40,000$37,500$35,000$32,500$30,000$27,500$25,000$22,500$20,000$17,500$15,000$12,500$10,000$7,500$5,000$2,500$87,675$(1,861)$(3,777)$(5,752)$(7,785)$(9,879)$(12,036)$(14,258)$(16,547)$(18,904)$(21,332)$(23,833)$(26,408)$(29,061)$(31,794)$(34,609)$(37,508)$(40,494)$(43,569)$(46,737)$(50,000)$(1,500)$(2,944)$(4,331)$(5,658)$(6,925)$(8,128)$(9,267)$(10,340)$(11,343)$(12,276)$(13,136)$(13,921)$(14,629)$(15,257)$(15,803)$(16,265)$(16,640)$(16,925)$(17,118)$(17,216)-$80,000
-$60,000
-$40,000
-$20,000
$0
$20,000
$40,000
$60,000
$80,000
$100,000
Example: $50,000 Debt-Funded Asset with 20-Year Life
Future Value
Asset Value Cumulative Principal Paid Cumulative Interest Paid
January 10, 2020
Page 25 of 33
Figure 8: Comparison of Theoretical System Value under Different Funding Mechanisms for $50,000 Capital Asset
SO HOW SHOULD A WATER SYSTEM ADDRESS DEPRECIATION ON DONATED OR GRANT-FUNDED
CAPITAL?
In short, per GASB-34 systems must report depreciation on donated or grant-funded capital. It is good
practice to designate capital as either contributed or non-contributed in asset records for the purpose of
rate-setting.
For the purpose of reserve planning, it is prudent to account for depreciation on contributed capital
when building reserves into rate revenue requirements to avoid getting behind in system reinvestment.
As noted, rate planning is not discussed specifically herein but systems should be aware of situations in
which contributed capital cannot be included in the rate base. Refer to the American Water Works
Association M1 Manual: Principles of Water Rates, Fees, and Charges.
BETTER MATCHING DEPRECIATION WITH ASSET ACTUAL LIFE
The discussion thus far has been that traditional straight-line depreciation is generally inadequate for
future replacement, and ideally systems should reinvest at some level above annual depreciation. This is
a general rule that must be weighed given unique system conditions.
For many systems, pipelines represent a significant portion of total system value. Depending on climate,
soil conditions, construction methods, and maintenance practices, pipelines may be the longest-lasting
capital assets in the system. Due to the significant value of a pipeline network and common practice of
depreciating the entire network as a group, depreciation is never reflective of the actual decline in
system value.
Suppose a system has significant investment in pipelines which were installed at a cost share with a
government entity. Accountants typically view pipelines as 50 to 75-year capital assets. In reality, it has
been found that pipelines can last much longer. A 2012 report by the American Water Works
$500,000 $500,000
$450,000
$50,000
$50,000
$-
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
Beginning Cash Value Cash Plus Asset Value with
Contributed Asset
Cash Plus Asset Value with
Cash-Funded Asset
Cash Value Contributed Asset Value Cash-Funded Asset Value
January 10, 2020
Page 26 of 33
Association (AWWA) found that the average life for pipe in the Midwest are: 85 to 135 years for cast
iron, 50 to 110 years for ductile iron, and 55 years for PVC. This, of course, can vary based on specific
system conditions, but given this information, it is easy to see how depreciating pipelines as a group
over 75 years, for instance, will not well-represent all pipelines. Some pipelines will have shorter than
expected useful lives and some will have longer; thus, depreciating a large quantity as a group could
result in significantly overstating understating depreciation cost, particularly for a large system. It is
reasonable to consider depreciating pipelines grouped by material and age. Figure 9 is a comparison of
the annual depreciation calculated for $100,000,000 investment in a pipeline network consisting of 14
percent PVC pipe and the balance as cast iron and ductile iron.
Figure 9: Annual Depreciation on $100,000,000 Pipeline System at Various Useful Lives
The orange bars in Figure 9 show the annual depreciation cost for all pipe, regardless of material, at
various years indicated on the X axis. The blue bar shows the calculated depreciation if the PVC pipe is
depreciated over 55 years and the cast iron and ductile iron pipe is depreciated at the number of years
indicated on the X axis. The illustration shows the difference caused by assumed useful life. By
compiling line break data and condition at the time of replacement, a system-specific replacement
strategy can be developed, and more accurate depreciation or renewal/replacement values can be
derived.
The point of this illustration is not to justify an investment level less than or greater than annual
depreciation, but to demonstrate the point that depreciation alone does not provide the best guide for
structuring reinvestment levels. A system with a practice involving regular pipeline rehabilitation might
be better off building reserves for future investment in vertical infrastructure and limited reserves for
future pipeline reinvestment. The point is that the more system-specific information you can include in
the basis for capital investment/reserve planning approach, the more fitting and the plan will be.
$1,818,182 $1,333,333 $1,250,000 $909,091 $800,000 $740,741 $1,818,182 $1,401,108 $1,329,423 $1,036,168 $942,326 $891,351 $-
$200,000.00
$400,000.00
$600,000.00
$800,000.00
$1,000,000.00
$1,200,000.00
$1,400,000.00
$1,600,000.00
$1,800,000.00
$2,000,000.00
55 75 80 110 125 135
Years
Annual Depreciation - All Pipe at X Years
Annual Depreciation - PVC at 55 Years, Iron at X Years
January 10, 2020
Page 27 of 33
LIFE CYCLE COST APPROACH TO CAPITAL PLANNING
A capital sustainability planning tool often used by utility managers, related to the topics of both
depreciation as an annual expense and condition assessment, is that of Life Cycle Cost Analysis (LCCA).
LCCA is used to develop short- and long-range maintenance and capital needs for specific infrastructure
components and minimize the overall cost of operation. The LCCA includes consideration of:
• Initial capital cost;
• Lifetime operation and maintenance cost;
• Periodic repair or renewal cost;
• Replacement cost;
• Salvage value; and
• Debt-related costs – loan interest, administrative fees, etc.
The LCCA can be calculated to compare alternatives or to evaluate future handling to an asset in terms
of rehabilitation or replacement. By evaluating cost over the expected life, a system can determine at
what point the cost associated with continued O&M and on-going renewal of a capital asset exceeds the
cost of replacement. Consider the simplified illustration of a pump station in Table 8, which is set up to
compare O&M and capital reinvestment cost for the pump station over time on the basis of annual cost
per thousand gallons. The values in Table 8 are entered in future dollars and need to be converted to
Present Value dollars using the following formula:
Present Value = 𝐹𝑟𝑟𝑟𝑟𝑐 𝑉𝑎𝑙𝑟𝑐
(1+𝑐𝑖𝑟𝑐𝑛𝑟𝑛𝑟 𝑐𝑎𝑐𝑟𝑛𝑟)^𝑌𝑐𝑎𝑟𝑟
The discount factor typically used is a Federal Discount Value published annually effective October 1 or
the Federal fiscal year. The rate is calculated by the US Treasury based on average market yields on
interest-bearing market securities that have a minimum of 15 more years to maturity. By law the rate
can change no more than one quarter of one percentage point annually. The rate for the FY19 fiscal
year was 2.875 percent.
The total of lines 1 through 4 of Table 8 would be summed in line 5 and converted to Present Value
dollars (line 6) using the equation described above. The O&M would likely be consistent until some
point later in the useful life, in which more maintenance may be required. For this particular asset, if
rehabilitation was completed every 10 years, as the life approaches 30 years the system manager would
likely evaluate the financial impact of completing another 10-year rehabilitation versus replacing the
facility, indicated by the red question marks in year 30 and 31 on lines 3 and 4. The annual cost per
thousand gallons pumped could then be compared to evaluate the difference in cost if the system
continues to extend the useful life versus replacing the asset. Based on the conclusions of the LCCA, the
manager can incorporate planning level O&M, renewal, and/or replacement values into the short- and
long-range budget and capital plans. Note that system management should consider whether the effort
required to complete LCCA is worthwhile, as in some cases, management may have enough historical
data to accurately predict and plan for renewal and replacement.
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Table 8: Example: Outline of Life Cycle Cost Calculation for Pump Station
Year
1
Years
2-9
Year
10
Years
11-19
Year
20
Years
21-30
Year
30
Year
31
1. Construction $
2. O&M $ $ $ $ $ $ $
3. Repair/Renewal $ $ $?
4. Replacement $?
5. Total (Future $) $ $ $ $ $ $ $ $
6. Total (Present $) $ $ $ $ $ $ $ $
7. Thousand Gallons
Pumped X X X X X X X X
8. Cost ($) per
Thousand Gallons
Pumped
$/X $/X $/X $/X $/X $/X $/X $/X
LCCA is an excellent tool to support efforts to maximize infrastructure life, provide cost savings by
minimizing emergency repairs, rehabilitate or replace assets before they fail, and potentially delay
future improvements. Such proactive measures allow more time for systems to develop funding for
improvements. Generally speaking, as a utility increases its planned (proactive) maintenance activities,
emergency repairs (reactive) will decline.
GENERAL RESERVE PLANNING GUIDELINES
A discussion of financial planning would not be complete without mention of guidelines for various
reserve funds maintained by a system. Though not the focus of this paper, when considering funding a
capital reserve it is important to evaluate other reserve funding practices or needs. Reserves are an
important component of the cost of operating and maintaining a system. Table 9 provides a summary
of common water reserve funds general target guidelines, though targets will be system-specific.
Existing policy and/or debt covenants may require reserve accounts to be funded in a certain priority.
January 10, 2020
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Table 9: Common Reserve Funds and Guidelines
RESERVE FUND DESCRIPTION/PURPOSE RECOMMENDED TARGET GUIDELINES
Operating
Cash available to ensure the utility
can meet on-going O&M expenses
despite seasonal revenue fluctuations
Minimum one-eighth of annual operating and
maintenance expense (45 days); 45-120 days,
sometimes up to one year of O&M
Debt Service
Restricted account required by
bond/loan covenant, held for the life
of the loan and used for final debt
retirement
As specified in bond/loan documents, typically
equal to the highest annual payment within
repayment period
Capital
Cash set aside for capital
renewal/replacement, or future
system expansion, based on desired
approach to capital funding
A strategic target is normally set based on
specific capital funding goals of the system;
some examples of common approaches include
one year of depreciation, a five-year average of
rate-funded capital investment, a percentage of
the annual capital improvements plan, and
capital asset management-based annual
reinvestment calculations
Emergency
A reserve fund specifically
established to offset revenue needed
in the event of unplanned
expenditures or events, such as a
drought
Approaches vary; sometimes based on the cost
of replacement of the most critical and
expensive infrastructure, or designed to replace
a critical revenue loss, such as in a drought
situation
Rate
Stabilization
Similar to an emergency reserve
designed to avoid rate spikes and
minimize necessary rate adjustments
when expenses are higher than
anticipated and/or revenues are less
than anticipated for any reason
A target is not always specified, sometimes set
as the amount of revenue associated with a
certain percent rate increase
SUMMARY OF SPECIAL TOPICS
• Donated or Grant-Funded capital assets must be depreciated and reported under GASB-34.
• A contributed capital asset will increase system value, as will a debt-funded capital asset once
the debt liability is retired.
• A cash-funded capital asset is an asset exchange which theoretically does not increase system
value.
• Regardless of funding mechanism, the system will incur annual depreciation expense on the
capital asset.
• The savings to rate payers when a capital asset is contributed versus debt- or cash-funded are
associated, respectively, with interest cost on debt and inflationary impacts on the cost of
replenishing reserves.
• Special rules exist for dealing with contributed capital for the purpose of rate-setting.
• For capital planning purposes, regardless of the assumed expected life used for calculating
depreciation for financial reporting, it makes sense to consider using system-specific data, if
available, particularly for assets typically grouped such as pipelines.
January 10, 2020
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• Life Cycle Cost Analysis is a practical tool that system managers can use to evaluate future O&M,
renewal, and replacement needs for specific infrastructure/facilities.
• Systems are advised to evaluate annual capital reserve funding needs in the context of overall
system reserve needs.
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PART 4: CONCLUSION AND CAPITAL PLANNING ROADMAP
Depreciation represents consumption of a capital asset. Without its capital assets a water system could
not operate at its intended level of service or generate revenue. As a result, use of capital assets is a
real component of the full cost of operation. In practice, this cost bears out as cash-funded capital
improvements, principal payments on debt, and/or contributions to capital reserves. From one year to
the next the amount of rate-funded capital generally varies, and principal payments can vary as loans
are retired and new debt is taken. Depreciation is meant to reflect annual capital-related revenue
requirements in a more level fashion.
Use of Depreciation by the Well-Operated System
For the water system manager, consideration of depreciation comes in two forms: financial reporting
requirements and as a managerial tool. The importance of compliance with financial reporting
requirements should not be underestimated, as it can affect the ability of a system to obtain funding
and generally place the system in a bad light. Water system customers expect utility managers and
decision makers to ensure that all financial planning and service requirements are met. Additionally,
system customers expect that the revenue provided for water service is put to good use operating and
maintaining the system in an efficient manner and using efforts to get the most out of system
infrastructure. Toward that end, full cost pricing of water rates should account for capital-related
revenue requirements that are based in part on depreciation values.
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January 10, 2020
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REFERENCES:
American Water Works Association. (2018). Cash Reserve Policy Guidelines. Denver, CO: AWWA Rates
and Charges Committee.
American Water Works Association. (2013). Buried No Longer: Confronting America’s Water
Infrastructure Challenges. Denver, CO: AWWA Water Utility Council and Stratus Consulting.
American Water Works Association. (2012). Financial Management for Water Utilities. Denver, CO: Bui,
Ann T. et al.
American Water Works Association. (2017). M1 Manual: Principles of Water Rates, Fees and Charges, 7th
Edition. Denver, CO.
Internal Revenue Service: https://www.irs.gov/irm/part1/irm_01-035-006#idm140511626097488
US Army Corps of Engineers (2016). Discount Rates in the Economic Evaluation of U.S. Army Corps of
Engineers Projects, https://www.everycrsreport.com/reports/R44594.html.
US Army Corps of Engineers (2018). Memorandum for Planning Community of Practice.
https://planning.erdc.dren.mil/toolbox/library/EGMs/EGM19-01.pdf
USEPA. (2002). Deteriorating Buried Infrastructure Management Challenges and Strategies. Washington,
DC: Office of Water.
USEPA. (2004). Taking Stock of Your Water System: A Simple Asset Inventory for Very Small Drinking
Water Systems. Washington, DC: Office of Water.
Wisconsin Public Service Commission. (2008).
https://psc.wi.gov/Documents/water/DepreciationBenchmarks.xlsx
Disclaimer: The authors and sponsors of this paper are not certified public accountants. The
information herein is intended to help system managers understand how to apply the concept of
depreciation in managing renewal/reinvestment in water system capital assets. Readers are advised to
consult an accountant for definitive answers to financial reporting questions.