Funding Asset Replacement: One Agency

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Funding Asset ReplacementOne Agencys Experience

• WEFTEC 2000Anaheim, CaliforniaOctober 18, 2000

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SRPs Purpose

• SRP System Replacement Planning
• Help water/wastewater utility management
  formulate financial policy for long-term system
  replacement needs

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Why?

• CMOM long-term spill mitigation
• GASB 34 modified approach compliance
• Establish effective reserve policy
• Defend existing reserves (Little Hoover issues)
• Maintain integrity of infrastructure (WIN Report)
• Position for upcoming federal funding
• Key component of good asset management!

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Who?

• Irvine Ranch Water District
• Orange County Sanitation District
• Orange County Water District
• Maui Board of Water Supply
• Roseville Water and Sewer
• City of Oxnard

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Elements of an SRP
SystemReplacementPlan
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Orange County Water District

• Major groundwater management agency
• Manages groundwater for 2.2 million people in
  Orange County
• Significant infrastructure assets (pipes,
  reclamation plants, wells, etc.)
• Planning (with Orange County Sanitation District)
  a very large reclamation/recharge project, GWRS
• Asset management considered a key issue

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Inventories in General

• Need to inventory assets
• Plant
• Pipe
• Equipment
• Each asset needs
• Useful life in years
• Current replacement cost

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Useful Life

• Remaining useful life can be based on assessed
  condition plus engineering judgment
• If there is no assessment, it can also be based
  on year in service and typical useful life for
  the type of asset

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Replacement Cost

• What would it cost to replace now?
• This may be higher than original cost, especially
  pipe (right-of-way issues)
• Changes in standards and technology can also
  affect replacement cost

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Refurbishments

• Each asset class can have several types of
  capital refurbishment for instance
• Painting
• Electrical rehab
• Mechanical rehab
• New pumps
• Each needs a cost and an interval
• Cost can be a percentage of replacement cost

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Tying Assets to the Fund

• Replacement Fund is the fundamental tool for
  accumulating replacement money
• Need
• Starting balance, earnings rate
• Annual replenishment amount(s)
• Percent of replacements funded
• Annual miscellaneous costs

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Other Funding Sources

• Rate surcharges
• Special bond issues
• Misc. cash flows

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Replacement Planning Model

• The RPM takes the inventories and financial data
  and creates reports
• Calculates future replacement costs and
  facilitates replacement fund analysis

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RPM Reports

• Fund expenditures by year
• Fund balances by year
• Cash flow from bond issuances
• Replacement needs (various categories)
• System replacement value, in aggregate or by
  sub-system
• Others

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RPMs Control Panel
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Pattern of Future Costs
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Expected Fund Performance
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Value of System Assets
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Making policy

• Replacement policy will be a mix of
• Establishing the initial fund balance
• Setting annual transfers from operations
• Issuing bonds (as needed)
• Assessing user surcharges (as needed)
• Best mix of these four will have smoothest rate
  impact and will avoid accumulation of large fund
  balances

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OCWDs Experience

• OCWD established an asset replacement fund
  (balance and replenishment amount)
• To control fund expenditures, procedures were
  needed and questions had to be answered

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Typical Questions (1)

• We need to replace meters and pump impellors as
  they are drawn from stock for routine
  maintenance. Should these be funded from the
  Replacement Fund?
• Were replacing a pickup, but want the new one
  to be four-wheel drive with an extended cab. It
  will cost 50 percent more. How do we handle this?

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Typical Questions (2)

• Were replacing several desktop computers. The
  new computers will be far more powerful than the
  old ones, but the costs will be about the same.
  Which fund should we charge to?
• Some of our analytical equipment is obsolete,
  even though its only three years old. It cannot
  detect contaminants at the levels required by new
  regulations. Does this qualify as a Replacement
  Fund expenditure?

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Typical Questions (3)

• One of our injection wells is failing. We want
  to replace it with a new one, but to leave the
  old well in place with limited capacity. Is this
  a replacement?
• We want to extend the lives of some of our pipes
  by interior coating. Is this a qualifying cost?

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Responding to the Questions

• Clear policies were needed for expenditures
  qualifying for the replacement fund
• These policies were built around definitions of
  key terms
• Replacements
• Refurbishments
• Upgrades
• Additions

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Replacement Criteria

• A qualifying investment will replace the
  functionality of an existing asset, and the
  existing asset will be taken out of service or
  remain in a state of severely impaired
  functionality.

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Refurbishment Criteria

• A qualifying investment will maintain an
  existing assets functionality, will have a value
  of greater that 3,000, and will extend the
  assets life by three years or more.

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Upgrade Criteria

• An upgrade will qualify for funding if
• The functionality of the new asset includes the
  functionality of the asset being replaced
• Management agrees that the added functionality is
  required or desirable and
• The cost of the new asset does not exceed 130 of
  the original cost of the asset being replaced on
  an inflation-adjusted basis.

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Asset additions

• An addition is the placing in service of an
  asset that does not replace the functionality of
  an existing asset being taken out of service or
  extend the life of an existing asset. The
  Replacement Fund does not pay for additions.

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Accounting Effects of Funding

• Separate funds were set up to account for
  replacement and refurbishment expenses
• Because of OCWDs fund structure, this became
  somewhat complex

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Assignment of Expendituresto Funds
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RPM Calibration

• Finally, the RPM needed to be calibrated
  against real-life replacement costs
• For two years, replacement costs have been
  somewhat lower than RPM forecasts
• Staff is considering adjusting (lengthening) some
  useful lives to increase forecast accuracy

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Summary

• Orange County Water District has established a
  replacement fund based on its actual
  infrastructure inventory
• Policies required for this fund and its use have
  been put into place
• Staff is dealing with replacement funding
  programmatically, measuring results, and
  adjusting policies on an ongoing basis

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An Unexpected Benefit

• OCWDs bond rating, already high, was upgraded
  last year
• The rating firm stated that the replacement fund,
  and staffs seriousness about its application,
  contributed to this upgrade

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Questions/Discussion
Andrew V. CzornyAssociate General
Manager/CFOOrange County Water DistrictFountain
Valley, CA(714) 378-3271aczorny_at_ocwd.com
V. Kenneth HarlowDirector of Management
ServicesBrown and CaldwellIrvine, CA(949)
260-6152kharlow_at_brwncald.com