ADMINISTRATIVE RECORD Plant O&M Cost Allocation. Flow and Loading Allocation Procedures

Transcription

1 ADMINISTRATIVE RECORD Plant O&M Cost Allocation Flow and Loading Allocation s April 15, 2010

2 TABLE OF CONTENTS Section 1 Introduction...1 Section 2 Background History of the Environmental Fees Concerns with the Current Allocation Methodology...3 Section 3 Phase I O&M Allocation Approach Capital Allocation Approach...5 Section 4 Water Allocation Methodology for Water O&M Costs Water O&M Allocations Deer Valley, Squaw Peak, and Union Hills Val Vista Verde Water Supply and Storage O&M Allocation Conclusions and Recommendations Triggers for Updates Allocation Methodology for Water Capital Costs Debt Service Allocation Methodology PAYGO Allocation Methodology Water Capital Allocations Debt Service Allocations PAYGO Allocations...16 Section 5 Wastewater Allocation Methodology for Wastewater O&M Costs Wastewater O&M Allocations st Avenue WWTP rd Avenue WWTP O&M Allocation Conclusions and Recommendations Triggers for Updates Allocation Methodology for Wastewater Capital Costs Debt Service Allocation Methodology...29

3 5.3.2 PAYGO Allocation Methodology Wastewater Capital Allocations Debt Service Allocations PAYGO Allocations...32 Section 6 Guidelines for Model Updates...33 Section 7 Project Conclusions...34 Glossary...35 Appendix A City Code... A-1 Appendix B Rate Parameters... A-5 Appendix C Description of Water Model Schedules... A-6 Appendix D Water Model Schedules... A-8 Appendix E Allocations for Deer Valley, Squaw Peak, and Union Hills... A-23 Appendix F Allocations and Electricity Data for Val Vista... A-27 Appendix G Allocations for Verde... A-30 Appendix H Chemical Budgets for WSS and WTPs... A-32 Appendix I CIP Project Evaluation Approach... A-34 Appendix J Water Bond Programs... A-35 Appendix K Water PAYGO Analysis... A-40 Appendix L Description of Wastewater Model Schedules... A-42 Appendix M Wastewater Model Schedules... A-44 Appendix N Chemicals Allocation and Data for 91 st Avenue WWTP... A-59 st Appendix O Electricity Allocation and Data for 91 Avenue WWTP... A-62 Appendix P Workload Evaluation Study and Allocation of Labor Costs... A-65 Appendix Q Compliance Lab Samples for 91 st Avenue WWTP and 23 rd Avenue WWTP.. A-68 rd Appendix R Chemicals Data for 23 Avenue WWTP... A-70 rd Appendix S Electricity Allocation for 23 Avenue WWTP... A-73 Appendix T Wastewater Bond Programs... A-75 Appendix U Wastewater PAYGO Analysis... A-81 Appendix V Model Modifications for FY A-82

4 1. INTRODUCTION The City of Phoenix (City) engaged Raftelis Financial Consulting, PA (RFC) and Malcolm Pirnie (together, the Project Team) to develop a revised methodology for calculating the City s water and wastewater environmental fees. RFC was responsible for developing the Microsoft Excel-based models for allocating costs to the water and wastewater rate parameters and reviewing the pay-as-you-go capital costs, while Malcolm Pirnie reviewed the bond programs and conducted the analyses necessary to populate the models. The revisions were necessary due to the restructuring of the operation and maintenance approach, as well as the growth in the system. The project was separated into two phases, with the first phase serving as the conceptual design and the second phase consisting of modeling the conceptual design. This report provides background information and a description of the first phase of the project. The report then discusses the water and wastewater environmental fees. The following sections are included for both water and wastewater: Allocation Methodology for O&M Costs; O&M Allocations; Allocation Methodology for Capital Costs; and Capital Allocations. The report ends with a section on the conclusions from the project. Page 1

5 2. BACKGROUND 2.1 History of the Environmental Fees In 1992, the Phoenix City Council (City Council) adopted an environmental fee as part of the water and wastewater rate structures. The environmental fee adopted was a charge calculated on a per hundred cubic feet (Ccf) basis. The environmental fee had two purposes. One purpose of the environmental charges was to demonstrate to the City s customers the local cost to meet federally mandated water and wastewater environmental programs. The second purpose was to establish an independent means to recover the cost of these mandates in an equitable manner. The City Council specified the costs that could be recovered through each environmental fee. The water environmental charge is focused on recovering the costs associated with processes required to meet the 1987 amendments to the Safe Drinking Water Act and the National Pollution Discharge Elimination System (NPDES) permit. In particular, water treatment plant (WTP) costs are authorized under Water, Article XI: Sections through The wastewater environmental charge is focused on recovering any costs incurred for exceeding normal secondary treatment. Wastewater treatment plant (WWTP) costs that are allocated to the environmental fee are authorized under Sewers, Article XI: Sections through of the Phoenix City Code (City Code). These sections of the City Code are included in Appendix A. Since the implementation of the environmental charges, the City s Water Services Department (Department or WSD) has undergone dramatic changes. Due to the tremendous growth in the City, new facilities have been added, existing facilities have been modified, and operating/staffing dynamics have changed. In addition, the Department is currently undergoing process reengineering, which may cause problems with the current allocation methodology. Much of this change has been the result of regulations that would impact the environmental fee. The calculation of the environmental rate has been integrated into the City s financial system, SAP. The calculation involves the allocation of operations and maintenance (O&M) costs to specific rate parameters based on explicit assumptions and methodologies. The Finance Department uses the allocation to rate parameters to calculate annual water and wastewater rates and charges. The water and wastewater rate parameters are listed in Appendix B. Due to the changes in the Department, such as the implementation of reengineering, the assumptions and methodologies used to develop the environmental rate need to be revisited to ensure that the current cost allocation approach determines an appropriate rate. In addition, due to the City s growth over the last nine years and the greater regulatory complexity, the cost allocation process has become somewhat unwieldy. The environmental charges have met with little customer resistance even though the water fee has doubled and the wastewater fee has increased by over 60% since The Department received an unexpectedly low volume of customer service calls following the implementation of the environmental charges. Since the implementation in 1992, there have been minimal total Page 2

6 water and wastewater rate increases, which has also helped minimize customer complaints regarding the environmental charge. Exhibit 1 shows the original and current environmental fees. Exhibit 1 Environmental Fees (per Ccf) % increase Water $ $ % Wastewater $ $ % 2.2 Concerns with the Current Allocation Methodology During the first phase of this project, Department staff (Staff) identified five primary concerns with the current methodology for allocating costs to the environmental parameters. Each concern is outlined below. The Management Services Division, which is in charge of calculating the water and wastewater rate parameters, indicated that the methodology was very difficult to administer. While some of the allocations are based on readily available financial and accounting data, other allocations require fairly detailed input from field staff. This data can be difficult to obtain, manipulate, and integrate into the SAP system. As a result, the process of calculating the rate parameters has become burdensome. Completing the reports that are needed by the Management Services Division, such as time studies, involves considerable effort and cost. This increases the likelihood that the data provided to the Management Services Division is not representative of the actual system dynamics. Staff within the Management Services Division noted that the current methodology uses an inconsistent level of detail and relies on data that may not be accurate. For example, the wastewater allocation is much more rigorous than the water allocation. Staff are also concerned that the field data may not provide a representative measure of the costs that the Department is incurring that should be allocated to the environmental parameters. Page 3

7 The Department has changed since the implementation of the environmental fees. With process reengineering and the Lake Pleasant Project 1, the Department will continue to evolve. Management Services Division staff believe that the current methodology lacks the dynamic nature necessary to account for changes in the Department. For example, under the current methodology there is a distinct difference between operations and maintenance. As a result of process reengineering, this difference has become nebulous, which will cause difficulties if the current allocation methodology continues to be utilized. Finance Department staff, who are responsible for taking the rate parameters that the Management Services Division generates through SAP and developing the appropriate rates, noted that, under the current approach, it is challenging to determine the cause(s) of rate changes because of the complexity of using allocation methodologies for rate-setting purposes in the SAP financial/accounting system. 1 The Lake Pleasant WTP will be designed, constructed, and operated by a private entity so the approach for capturing the Lake Pleasant WTP environmental costs may be slightly different than for the other WTPs. Page 4

8 3. PHASE I The primary objective of Phase I of the project was to develop an appropriate allocation methodology for water and wastewater O&M and capital costs. The allocation methodology developed in Phase I is described below. 3.1 O&M Allocation Approach As a part of Phase I, the Project Team and staff determined that the O&M allocations would be based on the allocation of costs to processes and then the allocation of process costs to environmental and non-environmental rate parameters. The proposed methodology would rely on the SAP system for allocating indirect and overhead costs to the WTPs and WWTPs. The Project Team, with input from the City, would then determine the processes that are employed for water and wastewater treatment at each of the plants. In order to minimize the challenges of future updates, the Project Team and the City would attempt to segregate plant operations into the fewest processes that would allow for an appropriate allocation between environmental and non-environmental costs. After the appropriate processes had been established for water and wastewater treatment, the Project Team would evaluate each plant to determine the allocation of specific cost categories to each of the processes within that plant. The Project Team would then determine the allocation of each process to environmental or non-environmental rate parameters. The allocation matrices developed by the Project Team would be used for the next three to five years (or until a significant change in the processes or allocations occurs), so there would not be the need to constantly update allocations based on the work at the plants. The Project Team would attempt to develop allocations for any anticipated process in an effort to lengthen the time in which the original allocation is valid. 3.2 Capital Allocation Approach There are two types of capital expenses that need to be allocated between the environmental and non-environmental rate parameters, debt service from bonds and pay-as-you-go (PAYGO) capital. Bonds are generally issued for large, cash-intensive projects. The City typically issues a series of water or wastewater bonds as needed (approximately every two to three years). PAYGO capital generally is used for replacement type projects and for projects in high-growth areas. Often these projects have a much smaller scope. The City funds varying levels of PAYGO projects each year through reserves, rate revenue, and development fees. For the capital allocation, it was decided that the Project Team, with assistance from the City, would review the projects funded through bonds that have existing debt service to determine the allocation between environmental and non-environmental rate parameters. The Project Team Page 5

9 would also evaluate the current CIP and anticipated bond issues to estimate the portion of proposed debt service that should be allocated to the environmental rate parameter. These projections would then be updated in the model when the bonds are issued and the actual projects to be funded are identified, and finalized once the proceeds from the bonds have been expended on specific projects. The level and type of PAYGO projects funded can vary significantly from year to year. In order to eliminate the potential for large annual changes in the environmental fees, the Project Team would develop a five-year projection of the allocation of PAYGO capital between environmental and non-environmental rate parameters. The average for the five-year projection would then be applied for an upcoming year. This projection would be updated each year so there will be a rolling average of PAYGO projects included in the environmental parameter, which should help to stabilize the environmental fees. Page 6

10 4. WATER Phase II consisted of two primary tasks, 1) developing a model to calculate the environmental rate parameters based on the allocation methodologies and 2) populating the model with the necessary allocation percentages. In order to simplify the update process, the model was developed as a series of Microsoft Excel spreadsheets. The model includes a ten-year period to serve as a planning tool and provide the City with the capability to smooth impacts, if necessary. Once populated with the appropriate capital and O&M allocation percentages, the model then only requires cost inputs from the City to calculate the environmental rate parameter(s). A description of each schedule of the water model is included in Appendix C and the model schedules appear in Appendix D. This section of the report presents the methodology and findings of an analysis that apportions operational costs for the City s WTPs and water supply and storage (WSS) stations between environmental and non-environmental rate parameters. 4.1 Allocation Methodology for Water O&M Costs Operations and maintenance costs for the water treatment plants were allocated between environmental and non-environmental components according to the Phoenix City Code. The Code identifies certain water treatment processes such as corrosion control and used water recovery whose costs are to be recovered from the City s customers by the water environmental charge. The addition of polymer or other materials to form a matrix that aids in settling and separation, a process known as sweet flocculation (or sweet floc) also falls into this category. The O&M cost of a process consists of expenditures for chemicals, electricity, labor, and any other general or special expenditures. Since the expenditures for each plant as a whole were to be considered, the chemical, energy, labor and special costs (such as large contractual services) were extracted from the City budget and analyzed to determine a percentage that could be allocated to the environmental fee. This top down approach is also compatible with the budgeting and expenditure reporting process, making calculation of environmental costs from the summary budget possible. Chemicals Four of the chemicals in the water treatment plants are used in processes specified by the City Code as environmental. They are sulfuric acid (used in disinfection by-product control), caustic soda (used both in disinfection by-product and corrosion control), UWR polymer (used for water recovery), and sodium hypochlorite (used in disinfection by-product reduction). The expenditure on each of these chemicals is tracked to the plant level. The percentage expenditure on these chemicals is applied to the overall chemical cost of the division summary budget. The detailed chemical budget tracks actual chemical use while the division summary budget is concerned with chemical procurement. It is assumed that the amount of chemicals procured is the same as the amount used. Page 7

11 Electricity and Natural Gas The greatest portion of electrical costs is for high lift distribution pumping stations and for removing solids from backwash and used water recovery systems. In comparison, water treatment process operations use very little power. The electricity to operate the high lift distribution system is a normal O&M cost and is not allocated to the environmental fee. The electricity for solids recovery and disposal is part of the environmental fee because solids removal is necessary to meet NPDES requirements and enhance used water recovery systems. Labor Labor costs are defined as those designated as personal services in the division summary budget. Allocating these costs into environmental and non-environmental components based on a cursory short-term study or purely from theoretical workload estimates would be inaccurate. To accurately apportion these costs, data over a reasonable period of time must be collected or a representative sample obtained. The sample chosen was WSD Activity charges. These are interdepartmental work orders used to ensure that the time spent by an employee of one division who is working for another division is accounted for in an accurate manner. These charges clearly distinguish between environmental and non-environmental tasks. Since these work orders can be considered a representative sample of all work done at the plant, the same percentage of environmental work is applied to personal services. Raw Water and Solid Waste Disposal Services Once chemicals, labor and energy were removed, the budget for each plant was inspected and other high dollar items dealt with separately. Large costs were incurred at most plants for raw water purchases and for solid waste disposal services. Raw water purchases are included in the raw water rate parameter and are not considered an environmental charge. For that reason, the cost is allocated completely to the non-environmental component. Solid waste disposal services are contractual costs incurred for hauling solids away from the site and disposing of the solids in an approved manner. This process is in the realm of advanced water treatment, a process designated as environmental by the City Code that provides for costs incurred to treat solids to meet the requirements of receiving bodies. As a result, this charge is allocated to the environmental fee. General Any remaining charges that are not accounted for at this point are considered General costs and allocated based on the weighted average of the previous cost categories. General costs consist of items such as administrative and legal charges that cannot easily be attributed to any specific chemical or process, but are required for general plant operation and maintenance. WSD assessments, which are inter-departmental special budget adjustments, are another type of cost that is included in the General costs. Page 8

12 Exhibit 2 Proposed O&M Allocation Methodology for Water Allocation of Budgeted Water Administrative and Indirect Costs Water Supply & Storage Operations Maintenance Administration & Indirect WTPs Operations Maintenance Administration & Indirect Personal Services Electricity Natural Gas Solid Waste Disp Svcs. Raw Water Chemicals General Sweet Floc Solids Raw Water Other Env. Fee Non-Env. Fee Env. Fee Non-Env. Fee Raw Water 4.2 Water O&M Allocations Deer Valley, Squaw Peak, and Union Hills The energy used in sludge production at these plants cannot be assigned to the environmental fee since the sludge is not treated and disposed of off-site. The City Code allows for solids and residuals (sludge) handling costs to be allocated to the water environmental charge if it is used to meet water quality standards for discharge to receiving bodies. Deer Valley and Squaw Peak release their sludge into the canal without thickening or treatment. Union Hills disposes of its sludge onsite. In these cases, the City Code requirements for inclusion in the environmental fee are not satisfied. It is important to note that Deer Valley and Squaw Peak will begin to thicken and dispose of their sludge offsite in the coming years to comply with NPDES requirements. When this occurs, a review of the allocations will be necessary to ensure the appropriate allocation of costs to environmental and non-environmental rate parameters. The chemical, Page 9

13 electrical, and labor allocations for Deer Valley, Squaw Peak, and Union Hills are included in Appendix E. Page 10

14 4.2.2 Val Vista Sludge is treated and disposed of offsite. Solids disposal costs are part of the environmental charge because it is part of the used water recovery process. The energy costs used in sludge production have to be isolated from the overall energy costs, which also includes charges for other plant equipment such as process water pumps. The percentage of the fiscal year (FY) electricity cost (the last full year when detailed records were kept according to staff) required for sludge thickening and treatment was assigned to the environmental component. Discussions with plant personnel confirm that the energy percentages remain valid with current usage. The environmental percentage comprises costs for centrifuges, recovery water pumps, thickeners, and centrate pumps. Other electrical costs, such as those involved in running the equipment pumps, are allocated to the operations component. Since the water at this plant is delivered by gravity, there is little additional electricity used for distribution. The chemical, electrical, and labor allocations for Val Vista, as well as raw electricity data, are presented in Appendix F Verde The Verde WTP treats and disposes of sludge in a manner similar to Val Vista, and thus fulfills the City Code requirements for used water recovery. The energy used for solids thickening is estimated from the overall energy expenditure which includes charges to run other, non-solids related plant equipment and to distribute the treated water. To determine the Verde environmental electricity cost, the environmental cost per ton of sludge produced at Val Vista was computed. This value was then multiplied by the tonnage of sludge at Verde to determine the environmental electricity cost. The balance was assigned to a non-environmental rate parameter. Discussions with plant personnel reveal that the sludge treatment and disposal process at Val Vista and Verde are similar, and verified that this approach could be applied. This calculation of environmental-fee related energy expenditure is included in Appendix G. Additionally, the Verde WTP is located on the Gila Indian Reservation and leasing costs are a significant annual non-environmental cost Water Supply and Storage The North and South WSS systems have operating costs that are allocated to the environmental fee. These two stations are the collective term used to describe the 148 well fields, 106 remote chlorination stations, 350 booster stations, 86 pressure reducing valves, and 53 fluoride station reservoirs required to deliver water and maintain quality to consumers. The only element of the WSS that is related to the environmental fee is remote chlorination. Therefore, the cost of remote chlorination is assigned to the environmental component and the balance is assigned to operations. As is the case with the WTP analysis, chemicals and labor costs in the budget are isolated. Maintenance costs are also extracted. The costs for remote Page 11

15 chlorination are completely contained within these categories and the remainder of the budget is assigned entirely to the non-environmental component. Exhibit 3 Proposed O&M Allocation Methodology for Water Supply and Storage Water Supply & Storage Operations Maintenance Administration & Indirect Personal Services Contractual Services Chemical Raw Water. Other Env. Fee Non-Env. Fee Raw Water The chemical budget for the WSS is reported with the chemical budget for the WTPs. The chemical budget is included in Appendix H. The only chemical expenditures for the WSS stations in FY are for chlorine and sodium hypochlorite. Both of these chemicals are related to an environmental process, and therefore the entire chemical expenditure of the WSS is allocated to the environmental fee. It is important to note that in FY there was no WSS expenditure for fluoride. If fluoride purchases are included in the WSS chemical budget in the future, their cost must be assigned to the non-environmental component and a review of the chemical allocation methodology for WSS must be conducted. Isolating the cost of electricity and associated supplies is not required for WSS. Remote chlorination uses negligible energy in contrast to the booster stations and other operational equipment, so all WSS electrical costs are assumed to be non-environmental. As in the case for the WTPs, labor was defined as the sum of personal services billed to WSS. Remote chlorination is a labor-intensive process and discussions with WSS personnel indicate that 25% of the total labor at WSS is used for this purpose. Discussions also indicate that 10% of cost of items included under Maintenance in the Division Summary Budget are due to remote chlorination and thus related to the environmental fee. The allocation of environmental components for chemicals, labor and maintenance fully cover the costs of remote chlorination and are the only charges attributed to the environmental fee. Page 12

16 4.2.5 O&M Allocation Conclusions and Recommendations A single-tiered approach is applied to five WTPs, with costs being allocated to the environmental or non-environmental component. Chemicals, energy and labor costs are allocated on the basis of chemical purpose and applicable environmental regulations. Raw water purchases are assigned to the raw water rate parameter, while solids services (except for Union Hills) are assigned to the environmental component. Further, where there is a significant cost for leasing land, as is the case for the Verde WTP, the cost is assigned to the non-environmental component. Based upon this rationale, the cost of running Val Vista is approximately 43% environmental while that of Verde is approximately 24% environmental. Squaw Peak has approximately 10% environmental costs, Union Hills has less than 1% environmental costs, and Deer Valley has almost 0% environmental costs. It is important to note that these estimates are based on current plant processes. Major changes in plant operations will affect the given ratios and a careful review is recommended every three to five years to ensure that the presented assumptions are still valid. The allocation of environmental costs for two WSSs follows generally the methodology for the WTPs. WSS charges are those associated with well fields, remote fluoridation and chlorination, booster stations, and pressure reducing valves. A percentage of the chemicals, labor and maintenance costs were assigned to the environmental component to account for the cost of remote chlorination, which is the only process that is related to the environmental fee. In all, this analysis indicates that about 13% of the charges associated with the WSSs are related to the environmental fee. It is important to note that the cost of fluoride was not included in the chemical budget for the WSS. If this changes, a review of the chemical cost allocation will become necessary. In addition, the remote chlorination stations are currently time-intensive as operators are still becoming accustomed to new equipment. A review is recommended periodically every three to five years to ensure that WSS allocation percentages are reflective of actual operating conditions Triggers for Updates Major changes in plant operating methods will, of course, require a reevaluation of the model assumptions. Since the model is based on a strict interpretation of relevant environmental regulations and the City Code, changes in the laws may also require a model reevaluation. It is anticipated that the two WTPs that currently do not dispose of treated sludge off-site (Squaw Peak and Deer Valley) will start doing so. In that event, once the new process has stabilized, discussions with plant personnel will be necessary to determine if the process is performed in a similar manner to Val Vista and Verde. If this is the case, the approach applied at Verde (multiplying an environmental cost per ton of solids produced by the total tonnage) can be used. If, however, operators feel that the upgraded plants are operating in a materially different manner, the model will have to be reevaluated. O&M costs to be allocated to the environmental rate parameter would include labor, chemicals, and electricity, so a review of these cost allocations Page 13

17 would be necessary. Any sludge hauling costs, including outsourcing contracts, would also become a part of the environmental fee component. Further, if the chemical dosage regime at the WTPs or the WSSs changes drastically, the model should be reexamined. The presented model was assembled in a modular framework, and it is anticipated that process or regulatory changes will only require changes to the portion of the model that is affected. As is the case with any attempt to model a system as vast as the water processes for an entire city, a review must be conducted every three to five years to determine if the underlying assumptions are still valid. 4.3 Allocation Methodology for Water Capital Costs There are two types of capital costs that the City incurs on an annual basis, debt service on outstanding bond issues and rate-funded capital or PAYGO capital. There are certain differences between these types of capital costs, which necessitate treating them slightly differently. The methodology used for the allocations, as well as specific information regarding the allocations is provided in the following sections Debt Service Allocation Methodology The purpose of the water bond program review is to update the environmental fee with the project costs from the capital improvements program (CIP) for the following authorizations: Year Authorized Program Request 1988 $ 195,321,202 2 $ 1 195,321, ,000, ,100, ,000, ,651,000 Water Total $ 455,321,202 $ 673,072,202 Each bond program was evaluated using a number of sources to determine if an individual project from each bond program should be allocated to the environmental fee. The information used was the project description in the Offering Statement (OS), description and estimated costs in the five-year CIP, preliminary engineering studies and project descriptions and costs, approved schedule of values from construction, and contractor pay applications. The hierarchy of information for order of use is as follows: 1. Bond reconciliation report; 2. Bond OS; 2 The Finance Department has reconciled the 1988 Water Bond programs. 3 The Water Services Department had a total listing of projects valued at $194,710,000 in the OS. The value listed in the table are the projects requested for immediate funding as they were under design, ready for bid, or under construction and funding was critical to maintain the integrity of the remaining funding in the CIP. Page 14

18 3. CIP descriptions; 4. Engineer s cost estimate; 5. Engineering reports/studies; 6. Schedule of values; and 7. Contractor pay requests. A bond reconciliation was only available for the 1988 bond program. The City decided that the OS should be used to establish the project list for each of the remaining bond programs. This is because: Bond programs are approved for a specific project list and cost estimate. The CIP projects and associated costs change over the life of the bond program. The Project Team tried to fix projects and costs for bond programs by year and sub-fund, but insufficient information was available. CIP information was not available for bond programs authorized in the early to mid 90 s. Therefore, it was more practical to use the OS and supplement the information required to determine if the cost should be allocated to the environmental fee. In some projects the entire cost is attributable to the environmental fee. For other projects only a portion of the costs can be allocated to the environmental fee and, therefore, additional information is necessary to make the cost allocation. A more detailed description of the allocation process is provided in Appendix I PAYGO Allocation Methodology During Phase I of the project, the Project Team and the City decided to allocate PAYGO based on a five-year projection of PAYGO costs. This required the Project Team to review the City s CIP. As a part of the planning process, the City categorizes all PAYGO projects as environmental, growth, or replacement. The Project Team calculated the average percentage of PAYGO costs listed in the CIP that were categorized as environmental. This methodology still leads to some fluctuations due to variances in the annual level of PAYGO, but it does smooth the impacts as compared with a year-by-year analysis. It would be possible to further smooth the PAYGO by taking the average dollar figure instead of dollar figure, but the Project Team believes that such an approach would stray too far from the cost analysis to be deemed acceptable. Page 15

19 4.4 Water Capital Allocations Debt Service Allocations 1988 Water Bonds The details for the 1988 Water Bond program, including a list of projects financed, total cost of each project and costs allocated to the environmental fee, are in Appendix J. The Department has reconciled the 1988 bond program. This means that the bond program has been expended and the project costs have been finalized. Of the $195,321,202 expended, $22,028,733 was expended on projects that can be allocated to the environmental fee. Approximately $14,700,000 was spent for solids recovery at the Verde, Deer Valley and Squaw Peak WTPs. The remaining funds allocated to the environmental fee were used to establish remote chlorination stations to comply with the Total Coliform Rule and perform additional studies to determine compliance with other proposed or anticipated amendments to the Safe Drinking Water Act Water Bonds The details from the 1994 Water Bond OS, including a list of the projects, costs and costs allocated to the environmental fee, are in Appendix J. Of the $110,000,000 authorized in Civic Improvement Corporation bonds, $108,100,000 has been allocated to projects with $22,300,000 allocated to environmental fee projects. These include projects for removing solids from discharge streams and recycling waste plant flows to meet NPDES permit requirements from the Verde and Val Vista water treatment plants. Also included are plant improvements to reduce disinfection by-product formation to meet trihalomethane (THM) formation limits and studies for the use of granular activated carbon (GAC) to also reduce THM formation potential Water Bonds The details from the 1996 Water Bond OS, including a project list and the allocation of costs to the environmental fee, are in Appendix J. The authorized program is $150,000,000. The cost of the projects total $369,651,000. The projects listed but not funded with this authorization will be rolled into subsequent bond issues. To determine which projects were financed the CIP was reviewed for projects, cost and environmental fee applicability. Of the $150,000,000 authorized, approximately $60,000,000 is for solids handling for the Squaw Peak, Deer Valley and Val Vista WTPs and solids disposal. Contractor pay requests were used for part of the environmental fee determination for Val Vista and Deer Valley WTPs. The pay requests include over $3,500,000 for well field compliance with amendments to the Safe Drinking Water Act, as well as $2,000,000 in study costs and over $13,000,000 for reclaimed water expenditures. All reclaimed water costs are allocated to the environmental fee. Since the use of reclaimed water decreases the dependence on potable water supplies when a lower quality of water can be used the City has chosen to capitalize some portions of the reclaimed water system from the water program. Page 16

20 4.4.2 PAYGO Allocation The environmental percentage for water was determined to be 13.8% for FY The PAYGO analysis is in Appendix K. The PAYGO percentage should be updated annually with the rolling five-year average. Since the City provided a ten-year CIP, the Project Team also calculated the ten-year average as a reality check. For both water and wastewater, the ten-year average is significantly lower than the five-year average. The Project Team decided that the five-year average is more appropriate because it is likely that in the later years there will be a bias against growth and environmental projects because these type of projects are less likely to be anticipated that far in the future. Page 17

21 5. WASTEWATER Phase II consisted of two primary tasks, 1) developing a model to calculate the environmental rate parameters based on the allocation methodologies and 2) populating the model with the necessary allocation percentages. In order to simplify the update process, the models were developed as a series of Microsoft Excel spreadsheets. The model projects costs for a ten-year period to serve as a planning tool and provide the City with the capability to smooth impacts if necessary. Once populated with the appropriate capital and O&M allocation percentages, the model then only requires cost inputs from the City to calculate the environmental rate parameter(s). A schedule by schedule description of the wastewater model is included in Appendix L and the model schedules appear in Appendix M. This section presents the methodology and findings of an analysis that apportions operational costs for City of Phoenix wastewater treatment plants between environmental and non-environmental components. Costs are further allocated to three parameters flow, BOD, and TSS. 5.1 Allocation Methodology for Wastewater O&M Costs The sections of the Phoenix City Code that outline the Sewer Environmental Charge specify that O&M costs for certain advanced wastewater treatment processes are to be recovered by this fee. These processes are specified in the City Code and include processes such as odor control, nitrification-denitrification (NdeN) and dechlorination. However, it became evident that the division summary budget does not allocate costs according to these processes, and a massive revamping of the budget reporting process prior to fee allocation was not the purpose of the study. The following pages present a method whereby the current reporting procedure is reconciled with the City Code to provide a method whereby the City budget (as currently reported) can be accurately assigned to environmental and non-environmental components. The procedure also provides for a second level of allocation environmental and non-environmental costs are sub-allocated to flow, BOD, and TSS. The premise of the allocation procedure is that any process specified as environmental requires chemicals, energy, and labor. The process might also incur special charges, as well as a share of general plant expenditure, such as administrative or legal costs. Since the charges for a plant as a whole are required and not for any one process, a top down approach can be adopted. Total chemical expenditure for the plant can be identified, isolated into individual chemicals, and the cost of the chemical assigned based upon its use. Similarly, energy costs can be identified, isolated into individual pieces of equipment based on metered usage, and allocated. Labor charges can be allocated based upon where workers spend their time. Sample collection and laboratory charges can be identified and assigned based upon the number of samples required for ordinary process monitoring versus those that are used in the context of advanced treatment processes. Once chemical, energy, labor, and lab charges have been allocated, the remaining Page 18

22 budget is inspected for any significant items that deserve special attention. For example, the solid waste disposal services line item is a significant contractual cost that is assigned entirely to the non-environmental component. This charge is for hauling away residual solids from the wastewater process, and is not related to any advanced sewage treatment process. Once these items have been dealt with, the remaining charges are those for general plant operation, such as administrative and legal costs, which are not part of any specific process. The City Code provides for the recovery of administrative and indirect costs of advanced treatment. Therefore, general costs are allocated to the environmental fee in a weighted average of chemical, energy, and the other previously considered costs. A two-tiered allocation process is applied to the WWTP analysis. The first tier differentiates between environmental and non-environmental costs. The second tier further apportions costs between flow, BOD, and TSS. This methodology is depicted in Exhibit 4, and costs are allocated for the following areas. Chemicals The annual cost of each chemical used at the WWTP is obtained from plant records. It is calculated as the average of expenditures in FY , the estimate for FY , and the estimate for FY The cost of each chemical is assigned as an environmental component or non-environmental component based on the chemical s use. Costs are then allocated depending on whether the chemical is used to reduce BOD, reduce TSS, or is dosed according to flow. The chemicals used routinely at the 91 st Avenue WWTP include sodium bisulfate, ferric chloride, chlorine, and various polymers, while the chemicals used routinely at the 23 rd Avenue WWTP include sulfur dioxide, caustic soda, ferric chloride, sodium chloride, chlorine, and various polymers. The chemicals are discussed in more detail in each WWTP section. Electricity and Natural Gas The electricity cost for each major class of equipment (such as blowers and sludge pumps) is calculated by multiplying total plant electricity cost by the fraction used by that component. The fraction is derived from plant records of metered usage. It is important to note that these records reflect actual usage. Electricity costs for each class of equipment are then allocated depending on whether the desired effect is normal plant operation or environmental fee related. Costs are further sub-allocated according to the degree to which energy usage for the equipment depend on levels of BOD, TSS and flow. Electrical supplies are also included in this category and are allocated in the same ratio as electricity costs. Personal Services Labor costs are defined as the sum of personal services incurred throughout the plant. These costs are apportioned between the process areas of headworks and primary treatment, aeration, secondary treatment (which includes the digesters and direct air flotation devices), disinfection, and solids handling. Costs are allocated to each of these process areas in proportion to the percentage of labor hours that are dedicated to each process. These percentages are derived from Page 19

23 the Reengineering Workload Evaluation Results for Redesigned Work Practices, which is a component of the 91 st Avenue WWTP Reengineering Pilot Plan that was presented on May 24, 2000 to the Sub-Regional Operating Group (SROG) Advisory Committee. The cost for each process is then allocated based upon whether its function is normal wastewater treatment or related to the environmental fee. These hours are then sub-allocated to BOD and TSS in accordance with removal efficiency, or according to flow if that is the criterion upon which the process is designed or operated. Solid Waste Disposal Services Solid waste disposal services are contractual costs for hauling and disposing of sludge produced from the primary and secondary treatment processes. This cost is not related to the environmental fee and is allocated in the proportion of BOD and TSS removal efficiency of the combined primary and secondary treatment stages. Pollution Control and Compliance Lab Charges These are costs associated with wastewater quality testing, both for process monitoring and for regulatory compliance. Pollution control charges are the cost of sample collection while compliance lab charges are the cost of sample analysis. The percentage of samples required for environmental compliance is applied to the environmental fee, and the balance applied to the non-environmental component. Costs are then allocated to flow in both cases. General Any remaining charges that are not accounted for at this point are considered General costs. General costs consist of items such as administrative and legal charges that cannot easily be attributed to any specific chemical or process, but are required for general plant operation and maintenance. General costs are allocated to the environmental and non-environmental components and sub-allocated to flow, BOD, and TSS based on the weighted average of chemicals, energy, labor, solids handling, and compliance lab charges. Page 20

24 Exhibit 4 Proposed O&M Allocation Methodology for Wastewater Allocation of Budgeted Wastewater Administrative and Indirect Costs Collection WWTPs Operations Maintenance Administration & Indirect Personal Services Chemical, Electricity, Etc. General Process 1 Process 2. Process N Env. Fee Non-Env. Fee Env. Fee Non-Env. Fee Flow BOD TSS Flow BOD TSS Flow BOD TSS Flow BOD TSS 5.2 Wastewater O&M Allocations st Avenue WWTP The 91 st Avenue WWTP is owned and operated by the SROG. The SROG members are the Cities of Glendale, Mesa, Phoenix, Scottsdale and Tempe. The City of Phoenix is the lead agency and operates the facility. The plant is currently being expanded from approximately 153 to 179 mgd. Each member city owns capacity in the facility by flow, BOD and TSS. Flow to the plant has been increasing at a rate of three to five mgd per year necessitating an expansion approximately every five years. The plant is a conventional activated sludge design with recycle and anoxic zones added for effluent denitrification. Solids are removed from the liquid stream, anaerobically digested, and centrifuged prior to land application. 4 Land application is by an 4 Solids are currently land applied as soil augmentation for cotton crops. Page 21

25 outside contractor. Effluent can be diverted by the Arizona Nuclear Power Plant under contract or discharged to the Gila River under an NPDES permit. The completion of plant IIIB by the end of 2001 and the construction of plant UP01 should not change the ratios in the cost allocation model as the plant processes are the same and the plant just has an increased capacity. The normal recommendation of re-evaluating the environmental fee component every three to five years is still valid. Chemicals Cost Allocation As outlined in the methodology, the yearly cost for each chemical is obtained from plant records and estimates. The average annual cost of each chemical is calculated from FY expenditure and estimates through FY The chemicals cost allocation and raw data are presented in Appendix N. The cost of each chemical is allocated between the environmental and non-environmental components and then allocated between flow, BOD, and TSS according to the purpose of the chemical. A discussion of the allocation for each chemical follows. Chlorine: Chlorination is a part of normal wastewater treatment operation and is therefore, not part of the environmental fee. Chlorine is dosed according to flow and not loading. Thus costs are allocated completely to the operations component and sub-allocated to flow. Dewatering Polymer and Thickening Polymer: These are chemicals associated with normal sludge processing and the cost is not considered environmental. Further, they are used to treat sludge from both the primary and secondary processes. Since BOD is not directly measured, its value was approximated as 60% of the chemical oxygen demand (COD), a correlation that was deemed reasonable by plant personnel. Plant records indicate that 98% of BOD and 97% of TSS were removed by the two stages. Allocating costs in proportion to relative treatment efficiency results in an equal division between BOD and TSS, as shown in Table I. Table 1-91 st Avenue WWTP Relative BOD/TSS Efficiency (Primary and Secondary Stages) Primary Effluent (mg/l) Secondary Effluent (mg/l) Removal (%) Percent of Total Removal COD BOD (estimate) % 50% TSS % 50% Total: 100% DAF Polymer: Direct air flotation devices (DAFS) are a normal part of secondary treatment, do not depend on flow, and are not part of advanced treatment. Costs are allocated according to the relative treatment efficiency of the secondary stage with respect to BOD and TSS. Plant records indicate that 95% of the BOD and 88% of the TSS entering the secondary stage are removed. Applying costs toward a combined Page 22