CWA explains methodology of proposed new capacity charges

The San Diego County Water Authority will be revising its capacity fees charged to new development to buy into existing SDCWA infrastructure and to fund the cost of expanded capacity needed to serve the new development.

“This is a draft document,” said CWA deputy general manager Sandra Kerl. “We’re doing this as an iterative process.”

Should the draft document equate to the final CWA board policy on capacity fee updates, the system capacity charge will increase from $4,326 to $4,681 per meter equivalent although due to debt offset issues the treatment capacity charge which is designed to recover capacity costs for the Twin Oaks and Levi treatment plants will be reduced from $166 to $119.

The CWA has engaged Carollo Engineering as a consultant. “Future customers would pay their fair and equitable share,” said Carollo Engineering group vice president Robb Grantham, who was part of a March 28 presentation to the CWA’s Administrative and Finance Committee. “The overlying principle is trying to maintain equity for existing and future customers.”

The CWA established a capacity charge in 1990. The capacity charge is a one-time payment to purchase system capacity for new or upsized meters, and there must be a reasonable nexus between the fee and the cost to provide or construct the capacity. The capacity infrastructure elements may include components for water resources, production, storage, distribution, and financial reserves. The CWA updated its capacity charge methodology in 1999, and in 2005 a hybrid methodology utilizing both system buy-in and incremental cost was adopted. The 2005 changes also established separate system and treatment capacity charges.

The system buy-in methodology is based on the premise that new users are buying into an existing system with available capacity and recovers the value of existing facilities only. That is appropriate when an existing system has adequate surplus capacity and does not require major capacity improvements. The buy-in amount is obtained by dividing the system’s current replacement value by the quantity of existing meter equivalents.

The incremental cost approach, which divides the value of future capacity by the quantity of future meter equivalents, is based on the cost to construct additional capacity to meet new demands and recovers the cost of capacity-related capital improvements. It is appropriate in cases where there is limited capacity in the existing facilities to serve future customers.

The hybrid approach recovers the value of available capacity in the existing system and the proportionate share of planned capital improvements. It is suitable when there is both some system capacity and plans to undertake major system improvements. The capacity cost is determined by dividing the total of the system’s current replacement value and the future costs by the total number of current and projected future meter equivalents.

The value of present capacity is determined by subtracting depreciation and debt principal costs from the replacement costs and reserve assets. The methodology does not list the full replacement value of an asset while taking depreciation on that asset. “Legally we’re not allowed to double-count,” Grantham said.

The meter equivalent is based on a 5/8-inch meter, which serves most single-family homes. The CWA has 912,000 existing meter equivalents, and based on San Diego Association of Governments population projections the CWA projects 177,000 new meter equivalents by 2035.

The estimated CWA facility asset replacement value is $3.8 billion. Reserves and other assets account for an additional $730 million. The CWA debt principal is $1.9 billion and the accumulated depreciation is $1.59 billion.

The use of the hybrid methodology creates a total net value of $5.1 billion for existing and future assets, subtracting $1.17 billion of liabilities from the $4.49 billion value of existing capital assets and $1.78 billion of future assets. The 1,089,000 current and future meter equivalents produced the new $4,681 system capacity rate.

The total value of treatment capital assets is $259 million not including $1 million of future capital improvement projects. The total liability adjustments for the treatment capacity fee is $137 billion, leading to a net value of $122 million to be shared by the 1,026,000 present and future treated water meter equivalents. The previous assessment was conducted prior to the Twin Oaks treatment plant debt issuance. “Ultimately that reduction in value is what drives the charge down,” Grantham said.

Outreach meetings with the Building Industry Association and other stakeholders will be held in early spring, and a request for preliminary guidance on rates and charges will be brought before the CWA board on April 25. The May board meeting will include the release of a cost of service report and the setting of a public hearing date for Calendar 2014 rates and charges including the system and treatment capacity fees. The CWA will likely accept the cost of service study at the board’s June 27 meeting, when the 2014 rates and charges will also be adopted.