JA40_Example_Completion_of_Schedules_for_FP-EPA_Type_Contracts_(2).pdf

GS-00P-13-BSC-0949 UTILITY SYSTEM PRIVATIZATION

Langley AFB, VA i

ATTACHMENT J40

Example Completion of Schedules for FP-EPA Type Contracts

TABLE OF CONTENTS

EXAMPLE COMPLETION OF SCHEDULES FOR FP-EPA TYPE CONTRACTS ............... I

EXAMPLE COMPLETION OF SCHEDULES FOR FP-EPA TYPE CONTRACTS

J40.1 EXAMPLE #1 [DISTRIBUTED RENEWALS & REPLACEMENTS]

J40.1.1 EXAMPLE 1 SCHEDULE B-2

J40.1.2 EXAMPLE 1 SUPPORTING CALCULATIONS

J40.1.2.1 Example 1 CLIN 0001 Utility Service Charge Supporting Calculations J40.1.2.2 Example 1 CLIN 0001 Monthly Credit as Payment for Purchase Price

Supporting Calculations J40.1.2.3 Example 1 CLIN 0002 Initial System Deficiency Corrections/Connection

Charges Supporting Calculations J40.1.2.4 Example 1 CLIN 0003 Recoverable Portion of the Purchase Price Supporting

Calculations J40.1.2.4 Example 1 CLIN 0004 Transition Period Supporting Calculations

J40.2 EXAMPLE #2 [FRONT-END LOADED RENEWALS & REPLACEMENTS]

J40.2.1 EXAMPLE 2 SCHEDULE B-2

J40.2.2 EXAMPLE 2 SUPPORTING CALCULATIONS

J40.2.2.1 Example 2 CLIN 0001 Utility Service Charge Supporting Calculations J40.1.2.2 Example 1 CLIN 0001 Monthly Credit as Payment for Purchase Price

Supporting Calculations J40.2.2.3 Example 1 CLIN 0002 Initial System Deficiency Corrections/Connection

Charges Supporting Calculations J40.2.2.4 Example 2 CLIN 0003 Recoverable Portion of the Purchase Price Supporting

Calculations J40.2.2.4 Example 2 CLIN 0004 Transition Period Supporting Calculations

J40.3 EXAMPLE #3 [BACK-END LOADED RENEWALS & REPLACEMENTS]

J40.3.1 EXAMPLE 3 SCHEDULE B-2

J40.3.2 EXAMPLE 3 SUPPORTING CALCULATIONS

J40.3.2.1 Example 3 CLIN 0001 Utility Service Charge Supporting Calculations J40.3.2.2 Example 3 CLIN 0001 Payment for Purchase Price Supporting Calculations37 J40.3.2.3 Example 3 CLIN 0002 Initial System Deficiency Corrections/Connection

Charges Supporting Calculations J40.3.2.4 Example 3 CLIN 0003 Monthly Charge for the Recoverable Portion of the

Purchase Price Supporting Calculations J40.3.2.4 Example 3 CLIN 0004 Transition Period Supporting Calculations ii

TABLES AND FIGURES

Example 1 Wastewater System Inventory Example 1 Government Recognized System Deficiencies Example 1 Schedule 2, Renewals and Replacements – 50 Year Schedule Example 1 Income and Cost Forecast by Year Example 1 Schedule 1, Utility Service Charge Example 1 Schedule 3, Initial System Deficiency Correction(s) / Connection Charge(s)/Transition

Period Example 1 Schedule 4, Recoverable Portion of Purchase Price

Example 2 Wastewater System Inventory Example 2 Government Recognized System Deficiencies Example 2 Schedule 2, Renewals and Replacements – 50 Year Schedule Example 2 Income and Cost Forecast by Year Example 2 Schedule 1, Utility Service Charge Example 2 Schedule 3, Initial System Deficiency Correction(s) / Connection Charge(s)/Transition

Period Example 2 Schedule 4, Recoverable Portion of Purchase Price

Example 3 Wastewater System Inventory Example 3 Government Recognized System Deficiencies Example 3 Schedule 2, Renewals and Replacements – 50 Year Schedule Example 3 Income and Cost Forecast by Year Example 3 Schedule 1, Utility Service Charge Example 3 Schedule 3, Initial System Deficiency Correction(s) / Connection Charge(s)/Transition

Period

Example 3 Schedule 4, Recoverable Portion of the Purchase Price

J40-1

ATTACHMENT J40

Example Completion of Schedules for FP-EPA Type Contract

The objective of this document is to illustrate through examples how to complete the required schedules in the request for proposal (RFP) for Fixed Price with Economic Price Adjustment (FP-EPA)type contracts. The schedules covered in these examples are Schedule B-2, Payment by the Government for Utility Services, Schedule 1, Utility Service Charge, Schedule 2, Renewals and Replacements – 50 Year Schedule, Schedule 3, Initial System Deficiency Correction(s) / Connection Charge(s)/Transition Period, and Schedule 4, Recoverable Portion of

Purchase Price.

Offerors proposing a FP-EPA contract must prepare their schedules in accordance with the methodology set forth in this Section.

The timing of renewal and replacement (R&R) investments is critical to the development of the schedules required for a FP-EPA type contract. The timing of investments is a function of the age and condition of the utility systems, which is illustrated in the following examples. Depending on the timing of investments, the required capital may be provided by the Government (i.e., R&R payments by Government in excess of investments made by the contractor), by the Contractor (i.e., investments by Contractor exceeding R&R payments from Government), or by the Government and Contractor alternately over the contract term.1

In projecting R&R investments, offerors need to make explicit assumptions with respect to the cost, timing, and components of Contractor and Government provided capital. The “annual interest rate” used in the J40 calculations must also transparently reflect the Offeror’s assumptions regarding the Contractor’s cost of capital for funding these replacements. (For example, the Offeror must clearly identify whether they anticipate borrowing funds, relying on internal reserves, or unexpended funds saved from prior Government payments, to pay for their forecast renewals and replacements). The most important part of this J40 exercise is for the Offeror to outline their detailed assumptions and calculations that go into their schedules.

All proposals utilizing Schedule B-2 must develop a residual value as described herein and must remove that calculated amount from the total amount used to calculate the proposed R&R annual/monthly charge.

Any proposal utilizing Schedule B-2 must provide the following information with the initial and final proposal revisions:

1. The profit level and mark-ups used in development of the R&R and Operations and Maintenance (O&M) charges. Also indicate if the same interest rate is used throughout the

1 The terms Offeror and Contractor are used somewhat interchangeably, but are intended to be the same entity, e.g., defined as the Offeror prior to contract award and as the Contractor after contract award.

J40-2 proposal (e.g., Purchase Price and Purchase Price Recovery, Initial System Deficiency

Correction(s) / Connection Charge(s)/Transition Period, and service charge for R&R).

2. The source of any necessary funding required to complete the R&R work and any associated interest or return on capital used in the rate development.

3. Any and all assumptions used to develop an adequate cash flow for both R&R and O&M, to include any inflationary effects built into pricing. Prices proposed for the utility service charge (CLIN 0001) in Schedules 1 and 2 shall be based on expected price levels during the first year of operation.

The following examples are for illustration purposes only and should not be taken as representative of any DoD utility system. Similarly, the values used or assumptions presented herein are hypothetical and offerors should not place any importance on them.

J40.1 Example #1 [Distributed Renewals & Replacements]

The Government is considering privatization of a wastewater collection system at one of its installations. It plans to complete the privatization in year 2012, resulting in a 50-year contract for utility service. The Government has issued an RFP that, among other things, requires Offerors submitting an FP-EPA proposal to complete Schedule B-2 presented in Section B.4.2 of the RFP and Schedules 1, 2, 3, and 4 presented in section B.7 of the RFP. The

Government’s inventory of the wastewater system is shown in Table J40-1.1.

J40-3

TABLE J40-1.1

Example 1 Wastewater System Inventory Utility Privatization

Component/Item Size Quantity Unit Approximate Year of Installation

Concrete Pipe 4-in. 2,000 Lf 1962

Concrete Pipe 12-in. 2,000 Lf 1962

Concrete Pipe 24-in. 4,000 Lf 1962

CI Pipe 4-in. 1,000 Lf 1975

CI Pipe 12-in. 4,000 Lf 1975

PVC Pipe 4-in. 3,000 Lf 1990

PVC Pipe 12-in. 8,000 Lf 1990

PVC Pipe 24-in. 4,000 Lf 1990

PVC Pipe 4-in. 3,000 Lf 2005

PVC Pipe 12-in. 8,000 Lf 2005

PVC Pipe 24-in. 4,000 Lf 2005

Manhole 20 Ea 1962

Manhole 10 Ea 1975

Manhole 30 Ea 1990

Manhole 30 Ea 2005

Lift Station #1 1 Ea 1975

Lift Station #2 1 Ea 1990

Lift Station #3 1 Ea 2005

In addition to the inventory, the RFP indicated there are no existing meters and no new meters need to be installed. The Government-recognized system deficiencies, including the approach the Government would take to remedy them if the system is not privatized, are shown in Table J40-1.2.

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TABLE J40-1.2

Example 1 Government Recognized System Deficiencies Utility Privatization

System Component Description of Deficiency Type

Collection System The system has excessive infiltration and inflow (I&I) Initial System Deficiency Correction

Lift Station #2 Lift Station #2 is inappropriately sized and causes overflows of sewage into the street

Initial System Deficiency Correction

Table Notes: Deficiencies may be categorized as an Initial System Deficiency Correction, renewal and replacements and/or operation and maintenance.

J40.1.1 Example 1 Schedule B-2

Schedule B-2 is prepared based on the amortized purchase price credit and the data presented in Schedule 1, Utility Service Charge, Schedule 2, Renewals and Replacements – 50 Year Schedule, and Schedule 4, Recoverable Portion of Purchase Price. Projects shown in Schedule 3, Initial System Deficiency Correction(s) / Connection Charge(s)/Transition Period, are not included in the totals shown in Schedule B-2, but are added to the monthly charge in accordance with the amortization schedule for each Initial System Deficiency Correction(s) / Connection Charge(s) project. The completed Schedule B-2 for Example 1 is presented in

Exhibit J40-1.1.

Installation name, State

Wastewater System: ____________________

CLINS SUPPLIES/SERVICES MONTHLY SERVICE

CREDIT/CHARGE

0001 Utility Service Charge (see B.6.1 and B.7.2)

The Contractor shall provide utility service in accordance with

Section C, Descriptions, Specifications, and Work Statement.

b

Monthly Credit as Payment for Purchase Price. (see B.6.2)

($4,219.28)_____ Monthly Credit

600____________ # of months

6%_____________ Interest Rate

TOTAL FOR CLIN 0001:

$6,032.34

($4,219.28)

$1,813.06

0002 Initial System Deficiency Corrections / Connection Charges –

(See B.6.3 and B.7.4 (Schedule 3)). This amount should not be included in the price offered for CLIN 0001.)

$Varies –

See Schedule 3

0003 Recoverable Portion of Purchase Price (see B.6.4 and B.7.5

(Schedule 4). This amount should not be included in the price offered for CLIN 0001

$3,586.39

See Schedule 4

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Installation name, State

Wastewater System: ____________________

0004 Transition Period

(See B.6.5 and B.7.4 (Schedule 3). This amount should not be included in the price offered for CLIN 0001).

$5,000

See Schedule 3 a Utility system to be filled in by the Offeror. A B-2 must be completed for each utility system offered.

Utility systems are shown in Schedule A, Paragraph B.3, Systems to be Privatized.

b The Offeror should enter the Utility Services Charge, as computed in Schedule 1 (see B.7.2). See B.6, Economic Price Adjustment Price Index Utility Privatization.

NOTE:

The Purchase Price, Recoverable Portion of the Purchase Price, interest rate and amortization period are proposed by the Offeror.

J40.1.2 Example 1 Supporting Calculations

The following sections describe the calculations used to determine the values for CLINs

0001, 0002, 0003 and 0004 in Schedules B-2.

J40.1.2.1 Example 1 CLIN 0001 Utility Service Charge Supporting Calculations

The Utility Service Charge (CLIN 0001) is comprised of two components – O&M and R&R.

Based on their assessment of the requirements in the RFP, their evaluation of the system, and their experience with wastewater systems, Party X determines the utility service charge for O&M to be $2,500.2 This amount includes all costs for operations, maintenance, repair, and associated administration and general costs. Party X is a public entity; therefore, it pays no

U.S. Federal taxes.

The utility service charge for R&R is developed starting with the example Schedule 2 developed by Party X shown in Table J40-1.3. R&R project costs are entered into Schedule 2 in constant dollars. The useful life is based on Party X’s experience. The Present Value is calculated using the current Real Discount Rate, 2.7 percent as of January 2010, as published in OMB Circular A-94, Guidelines and Discount Rates for Benefit Cost Analysis of Federal Programs, Appendix C and middle of the year discounting. The Residual Value is the unrecovered investment in the utility system remaining at the end of the contract term.3 It is calculated based on the remaining useful life at the end of the contract term (% of Useful Life remaining x R&R Project Cost). The present value of the cumulative Residual Value is subtracted from the cumulative present value of R&R project costs to determine the total present value of the R&R investment.

2 Demonstrating how to develop the monthly charge for O&M is beyond the intent of this guidance document.

3 The Government recognizes the residual value as a Government liability at the end of the contract term representing the Contractor’s unrecovered investment in the utility system.

J40-6

Please note: The description of Renewal or Replacement must be specific enough to identify the exact component/item from the inventory listing. The R&R schedule for each of the inventory items is clearly delineated. As shown in Table J40-1.3 Parts 1, the following must be clearly listed:

- The specific inventory line item (including component/item, size, quantity and installation date) undergoing R&R

- The type of replacement component/item if different from the original inventory item (i.e. if steel pipe is being replaced by PVC)

- The lifespan and expected replacement date(s) for the inventory line item and its replacement

- The cost per unit for the inventory line item and its replacement if different

- The impact of any Initial System Deficiency Correction(s) / Connection Charge(s) projects on the R&R schedule

- The residual value for each inventory line item (or respective replacement) at the end of the contract period

COMPETITIVE RFP TEMPLATE UTILITIES PRIVATIZATION

J40-7

Table J40-1.3 Part 1: Example 1 Schedule 2, Renewals and Replacements – 50 Year Schedule

A B C D E F G H I J K L M

Item Size Quant Unit

Approx

Year

Installed

Existing

Unit

RCN

Existing

Item

Service Life

First

Expected

Replace Date

New

Item

New

Item

Service

Life

New Unit

Cost RCN

New

Item

RCN

Next

Replace

Dates

Row 1 Concrete Pipe 4-in. 2,000 Lf 1962 $15 50 2012 PVC 50 $10 $20,000 2062

Row 2 Concrete Pipe 12-in. 2,000 Lf 1962 $20 50 2012 PVC 50 $20 $40,000 2062

Row 3 Concrete Pipe 24-in. 4,000 Lf 1962 $60 50 2012 PVC 50 $50 $200,000 2062

Row 4 CI Pipe 4-in. 1,000 Lf 1975 $25 50 2025 PVC 50 $10 $10,000 2075

Row 5 CI Pipe 12-in. 4,000 Lf 1975 $100 50 2025 PVC 50 $20 $80,000 2075

Row 6 PVC Pipe 4-in. 3,000 Lf 1990 $10 50 2040 same 50 $10 $30,000 2090

Row 7 PVC Pipe 12-in. 8,000 Lf 1990 $20 50 2040 same 50 $20 $160,000 2090

Row 8 PVC Pipe 24-in. 4,000 Lf 1990 $50 50 2040 same 50 $50 $200,000 2090

Row 9 PVC Pipe 4-in. 3,000 Lf 2005 $10 50 2055 same 50 $10 $30,000 2105

Row 10 PVC Pipe 12-in. 8,000 Lf 2005 $20 50 2055 same 50 $20 $160,000 2105

Row 11 PVC Pipe 24-in. 4,000 Lf 2005 $50 50 2055 same 50 $50 $200,000 2105

Row 12 Manhole 20 Ea 1965 $3,500 60 2025 same 60 $3,500 $70,000 2085

Row 13 Manhole 10 Ea 1975 $3,500 60 2035 same 60 $3,500 $35,000 2095

Row 14 Manhole 30 Ea 1990 $3,500 60 2050 same 60 $3,500 $105,000 2110

Row 15 Manhole 30 Ea 2005 $3,500 60 2065 same 60 $3,500 $105,000 2125

Row 16 Lift Station #1 1 Ea 1975 $25,000 50 2025 same 50 $25,000 $25,000 2075

Row 17 LS Controls,#1 1 Ea 1975 $50,000 20 2012 same 20 $50,000 $50,000 2032, 2052

Row 18 Lift Station #2 1 Ea 1990 $25,000 50 2012* same 50 $25,000 $25,000 2062

Row 19 LS Controls #2 1 Ea 1990 $50,000 20 2012 same 20 $50,000 $50,000 2032, 2052

Row 20 Lift Station #3 1 Ea 2005 $25,000 50 2055 same 50 $25,000 $25,000 2105

Row 21 LS Controls,#3 1 Ea 2005 $50,000 20 2025 same 20 $50,000 $50,000 2045

This table represents a sample R&R plan. For display purposes, the R&R table is split into two parts. The first part shows the inventory items, the associated costs and the respective replacement costs of the replacement items, if different from the original. The second part shown in Table J40-1.3 Part 2, shows the annual cost breakouts. Impacts of Initial System Deficiency Correction(s) / Connection Charge(s) projects on inventory must be accounted for in R&R plan.

Columns A-E: Lists the original inventory description

Columns F: Details the cost at the unit level

Column G: Lists the service/design life of the existing component/item

Column H: Lists the expected replacement date. Replacement date = Approx year Installed + Service Life

Column I-J: Describes the replacement component/item and the replacement component’s service life

Columns K-L: Details the cost of the replacement component/item at the unit and total quantity levels

Column M: Lists the next expected R&R dates. Replacement date = Approx year Installed + Service Life

*Row 18: Per Table J40-1.2 Lift Station #2 is listed as a deficiency. Contractor chose to replace LS #2 via R&R in first year.

J40-8

Table J40-1.3 Part 2: Example 1 Schedule 2, Renewals and Replacements – 50 Year Schedule A B C D E F G H I J K L M

Item Size

Const $

Year 1

Const $

Year 14

Const $

Year 21

Const $

Year 24

Const $

Year 29

Const $

Year 34

Const $

Year 39

Const $

Year 41

Const $

Year 44

Cumulative

Total

Residual Value

Const $ Year

Row 1 Concrete Pipe 4-in. $20,000 $20,000 $400

Row 2 Concrete Pipe 12-in. $40,000 $40,000 $800

Row 3 Concrete Pipe 24-in. $200,000 $200,000 $4000

Row 4 CI Pipe 4-in. $10,000 $10,000 $2,800

Row 5 CI Pipe 12-in. $80,000 $80,000 $22,400

Row 6 PVC Pipe 4-in. $30,000 $30,000 $17,400

Row 7 PVC Pipe 12-in. $160,000 $160,000 $92,800

Row 8 PVC Pipe 24-in. $200,000 $200,000 $116,000

Row 9 PVC Pipe 4-in. $30,000 $30,000 $26,400

Row 10 PVC Pipe 12-in. $160,000 $160,000 $140,800

Row 11 PVC Pipe 24-in. $200,000 $200,000 $176,000

Row 12 Manhole $70,000 $70,000 $28,000

Row 13 Manhole $35,000 $35,000 $19,833

Row 14 Manhole $105,000 $105,000 $85,750

Row 15 Manhole $0 $5,250

Row 16 Lift Station #1 $25,000 $25,000 $7,000

Row 17 LS Controls #1 $50,000 $50,000 $50,000 $150,000 $27,500

Row 18 Lift Station #2* $25,000 $25,000 $500

Row 19 LS Controls #2 $50,000 $50,000 $50,000 $150,000 $27,500

Row 20 Lift Station #3 $25,000 $25,000 $22,000

Row 21 LS Controls #3 $50,000 $50,000 $100,000 $10,000

Row A Total Const $ $385,000 $235,000 $100,000 $35,000 $390,000 $50,000 $105,000 $100,000 $415,000 $1,815,000 $833,133

Row B Present Values $379,905 $164,009 $57,917 $18,714 $182,519 $20,481 $37,647 $33,994 $130,237 $1,025,422 $222,832

This is the second part of the R&R schedule. It shows the annual R&R totals for each inventory line item.

Columns A-B: Lists original inventory as described in Part 1

Columns C-K: Corresponds to the year that R&R occurs. In accordance with B.5.2.1, dollar amounts are in constant year dollars based on the expected price levels during the first two years of the utility privatization service contract.

Column L: Totals of Columns C-K

Column M: The Residual Value (RV) is the value of the investment, in constant year dollars, at the end of the contract term. RV = Future Value x (Contract Year item installed + Design Life – Remaining Contract length) / Design Life. Contract Year is 1thru 50.

Row A: Lists the R&R totals in Const $per column

Row B: Present Value of Row A, where Present Value = Future Value x [ 1 / (1 + i)^n ] with Future Value is the R&R cost in const year dollars, i = the current Real (constant dollar) Discount Rate, 2.7%, as published in OMB Circular A-94, Appendix C (see for most recent rate) and n representing middle of the year discounting (i.e 2012 is year one so n = 0.5, in 2013 n =1.5 and so on)

*Row 18: Per Table J40-1.2 Lift Station #2 is listed as a deficiency. Contractor chose to replace LS #2 via R&R in first year.

J40-9

Example Residual Value Calculation based on Table J40-1.3 Part 2 A B C D E F G H I J K L M

Item Size

Const $

Year 1

Const $

Year 14

Const $

Year 21

Const $

Year 24

Const $

Year 29

Const $

Year 34

Const $

Year 39

Const $

Year 41

Const $

Year 44

Cumulative

Total

Residual Value

Const $ Year

Row 1 Concrete Pipe 4-in. $20,000 $20,000 $400

Row 2 Concrete Pipe 12-in. $40,000 $40,000 $800

Row 3 Concrete Pipe 24-in. $200,000 $200,000 $4,000

Row 4 CI Pipe 4-in. $10,000 $10,000 $2,800

Row 5 CI Pipe 12-in. $80,000 $80,000 $22,400

Row 6 PVC Pipe 4-in. $30,000 $30,000 $17,400

Row 7 PVC Pipe 12-in. $160,000 $160,000 $92,800

Row 8 PVC Pipe 24-in. $200,000 $200,000 $116,000

Row 9 PVC Pipe 4-in. $30,000 $30,000 $26,400

Row 10 PVC Pipe 12-in. $160,000 $160,000 $140,800

Row 11 PVC Pipe 24-in. $200,000 $200,000 $176,000

Row 12 Manhole $70,000 $70,000 $28,000

Row 13 Manhole $35,000 $35,000 $19,833

Row 14 Manhole $105,000 $105,000 $85,750

Row 15 Manhole $0 $5,250

Row 16 Lift Station #1 $25,000 $25,000 $7,000

Row 17 LS Controls #1 $50,000 $50,000 $50,000 $150,000 $27,500

Row 18 Lift Station #2* $25,000 $25,000 $500

Row 19 LS Controls #2 $50,000 $50,000 $50,000 $150,000 $27,500

Row 20 Lift Station #3 $25,000 $25,000 $22,000

Row 21 LS Controls #3 $50,000 $50,000 $100,000 $10,000

Row A Total Const $ $385,000 $235,000 $100,000 $35,000 $390,000 $50,000 $105,000 $100,000 $415,000 $1,815,000 $833,133

Row B Present Values $379,905 $164,009 $57,917 $18,714 $182,519 $20,481 $37,647 $33,994 $130,237 $1,025,422 $222,832

Column M: The Residual Value (RV) is the value of the investment, in constant year dollars, at the end of the contract term. RV = Future Value x (Contract Year item installed + Design Life – Remaining Contract length) / Design Life. Contract Year is 1thru 50.

Future Value = R&R Component Value (in constant year dollars) at time of last replacement

Contract Year item installed = Year of contract (1 through 50) when item is scheduled for its last replacement

Design Life = Time, in years, which the item is expected to last

Remaining Contract length = Time, in years, left in the contract at the point this Residual Value calculation is being performed. For initial proposals, a value of 50 years needs to be used.

Example: Calculation of Residual Value at contract start based on Row 17 LS Controls Future Value is $50,000, Contract Year of last replacement is year 41, Design life is 20 years and Remaining Contract length is 50 years.

RV = Future Value x (Contract Year item installed + Design Life – Remaining Contract length) / Design Life RV = $50,000 x (41 + 20 – 50) / 20 = $27,500

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As shown in Table J40-1.3, Party X proposes to spend $1,815,000.00 (in constant year dollars) on planned R&R over the 50-year contract term. The cumulative present value of R&R investments is $1,025,422, using the 2.7 percent Real Discount Rate published in January 2010 OMB Circular A-94, Guidelines and Discount Rates for Benefit Cost Analysis of Federal Programs, Appendix C, and middle of the year discounting. The cumulative residual value at the end of the contract term is $833,133. The present value of the cumulative residual value is $222,832. Therefore, the present value of Party X’s total investment in R&R during the contract term is $802,590 (=$1,025,422 - $222,832).4

Exhibit J40-1.2 shows the projected R&R investment by year. This chart shows a distribution of investments (costs) over the entire 50-year term of the contract, including early, middle and late investments.

EXHIBIT J40-1.2

Example 1 Renewals and Replacements Investment by Year Utility Privatization

Party X must develop a utility service charge for R&R to pay for the investments proposed in Schedule 2. The utility service charge is calculated by amortizing the Present Value of Total Investment in R&R ($802,590) over 600 months, using an interest rate that results in a monthly charge sufficient for Party X to pay for all of its R&R investments. It is important to emphasize that the interest rate must be carefully chosen. Some of the key factors that must be considered include the timing of investments (e.g., distributed, front-end loaded or back-end loaded) and the source(s) of capital to be used (borrowed funds, internal capital, an "escrow account," etc.). The basis (reasoning) for the interest rate chosen must be documented in, or as supporting documentation to, the proposed schedules. Based on the timing of the investments as shown in Exhibit J40-1.2, and their access to capital and financing, Party X uses a 4.80 percent annual interest rate to develop their utility service charge for R&R:

4 The present value of the cumulative residual value is subtracted from the present value of R&R investments to account for the value in the system at the end of the contract term.

Sum of R&R Project Cost (Constant Dollars)

$0 $50,000

$100,000 $150,000 $200,000

$250,000 $300,000 $350,000

$400,000 $450,000

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49

Year

J40-11

Calculation Result

Present Value of Proposed R&R Cost (from Schedule 2) => $1,025,422.03

Cumulative Residual Value due to R&R Investments (from Schedule 2) => $222,832.00

( PV )Present Value of Total Investment in R&R = 1,025,422.03 – 222,832 => $802,590.04

( n ) # Months to Recover R&R Cost => 600

Annual Interest Rate => 4.80%

( i ) Monthly Interest Rate = 0.0480 / 12 => 0.40%

( A ) Monthly R&R Charge a => $3,532.34

Table Notes:

a Monthly R&R Charge calculated based on uniform series of payments. A = PV x [ I x (1 + i) n ] / [ (1 + i) n

– 1 ]

Exhibit J40-1.3 shows the projected income and cost based on Party X’s utility service charge for R&R and Schedule 2 respectively. The balance is the year to year cumulative sum of the income and cost. The chart shows an initial negative balance where costs exceed income, followed by a longer period of income exceeding costs, ending with a near zero balance. The resulting near zero balance is provided to illustrate the example and should not be construed as a de facto requirement. For an actual proposal, it may be reasonable for the ending balance to be negative, positive or zero.5 It is incumbent upon the Offeror to consider all pertinent factors when developing their schedules, to include the resulting forecast of income and costs.6

EXHIBIT J40-1.3

Example 1 Income and Cost Forecast by Year

5 The Offeror should explain their reasoning for the resulting income and cost forecast based on their proposed service charge for R&R and their forecast of R&R investments from Schedule 2. I.e., why a net gain, loss or zero balance?

6 The Government would expect the residual value to be part of the subsequent contract for utility service (after the 50 year term) or that the Contractor would be due compensation if the contract was not renewed.

Income and Cost Forecast

$300,000.00

$200,000.00

$100,000.00

$0.00

$100,000.00

$200,000.00

$300,000.00

$400,000.00

$500,000.00

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49

Year

Income

Cost

Balance

J40-12

The Total Utility Service Charge (CLIN 0001) proposed by Party X is calculated as demonstrated in the example Schedule 1 shown in Table J40-1.4.

TABLE J40-1.4

Example 1 Schedule 1, Utility Service Charge Utility Privatization

Component Monthly Charge

1. Operations and Maintenance (O&M) $2,500.00

2. Renewals and Replacements $3,532.34

Total Utility Service Charge

(to be entered into CLIN 0001 for Schedule B-2) $6,032.34

J40.1.2.2 Example 1 CLIN 0001 Monthly Credit as Payment for Purchase Price Supporting Calculations

The Monthly Credit as Payment for Purchase Price (CLIN 0001) is calculated by amortizing the purchase price over the number of contract periods (months) the Offeror proposes to credit the purchase price.

Party X proposes to purchase the wastewater system for $500,000.00.

The $4,219.28 monthly credit is calculated by amortizing the $500,000.00 Purchase Price over 15 years (180 months) at a 6.0 percent annual interest rate (1.2 percentage points over the U.S. Treasury Bond rate of 4.8% assumed for this example)7. The $50,631.36 annual credit is calculated by multiplying the monthly credit by 12 months.

Calculation Results

Proposed Purchase Price => $500,000.00

( n ) # Months to Amortize Purchase Price => 180

Annual Interest Rate => 6.00%

( i ) Monthly Interest Rate = 0.06 / 12 => 0.50%

CLIN 0001, ( A ) Monthly Credit for Purchase Price a => $4,219.28

Annual Credit for Purchase Price = 12 x 4,219.28=> $50,631.36

Table Notes:

a Monthly Credit as Payment for Purchase Price is calculated based on uniform series of payments.

A = PV x [ i x (1 + i) n ] / [ (1 + i) n

– 1 ]

7 Source: 4.8% based on 4.93% for the 20-year U.S. Treasury Bond rate (www.federalreserve.gov/releases/H15/update/) plus the -0.13% adjustment for estimating the 30-year rate (www.treas.gov/offices/domestic-finance/debt-management/interest-rate/ltcompositeindex.html).

http://www.federalreserve.gov/releases/H15/update/

J40-13

J40.1.2.3 Example 1 CLIN 0002 Initial System Deficiency Corrections/Connection Charges Supporting Calculations

Initial System Deficiency Correction(s) / Connection Charge(s) are documented in Schedule

3. Transition costs are also included in Schedule 3; however, these costs are addressed in CLIN 0004—see section J40.1.2.4. Additions include Initial System Deficiency Corrections to remedy deficiencies. Based on their assessment of the utility system, Party X identified three deficiencies in the wastewater system.

All of the 1960s-era collection system piping needs to be replaced because it has reached the end of its useful life, requires excessive maintenance, and has unacceptable infiltration and inflow (I&I). The cost to replace the collection piping was determined to be $260,000. The replacement is to be done in year 1 of the contract term as planned renewal and replacement (R&R) costs. Even though this project may be a deficiency, Party X determined that it was actually the result of the system reaching the end of its useful life and therefore addressed it as a R&R project by including it in Schedule 2.

Cross connections between the Installation’s wastewater system and stormwater system were determined to be the cause of the I&I problem. The cost to remedy the cross connections was determined to be $125,000. Party X included an Initial System Deficiency Correction(s) / Connection Charge(s) project in Schedule 3 to address this deficiency. The project is amortized over 15 years at a 6.0 percent annual interest rate.

Party X also determines a program to periodically televise and test the system for I&I needs to be implemented. Party X determines the annual cost for this program will be

$2,000 per year, which is included in the $2,500 monthly operating cost.

The inappropriately sized lift station was evaluated and determined to be relatively new (built in 1990), in good condition, but inappropriately sized for the facilities served. The cost to replace the lift station was determined to be $25,000 and was incorporated into the first year of privatization as a planned R&R cost. Even though this project may be a deficiency, Party X accounted for it under R&R because it is a replacement and impacts the overall schedule of replacements.

Two of the deficiencies, replacing the 1962-era collection piping and lift station #2, were included in the first five years of planned R&R. A portion of the other deficiency was accounted for in the O&M component of the utility service charge. Remedying the cross-connections in the system was not included as R&R and it must be included in the Initial System Deficiency Corrections in Schedule 3.

Party X proposes a $125,000.00 Initial System Deficiency Correction to remedy the cross connections in the system. This project is scheduled to be completed in the 12th month of privatization and amortized over the next 60 months (months 13 through 73) at a 6.0 percent annual interest rate. Therefore, the addition to the utility service charge is based on a $125,000.00 investment, amortized over 60 months at a constant interest rate of 0.50 percent per month:

J40-14

(PV) Project Cost => $ 125,000.00

( n ) # Months to Amortize Project Cost => 60

Annual Interest Rate => 6.00%

( i ) Monthly Interest Rate = 0.06 / 12 => 0.50%

( A ) Monthly Charge a => $2,416.60

Table Notes:

a Monthly Charge calculated based on uniform series of payments. A = PV x [ i x (1 + i) n ] / [ (1 + i) n

– 1 ]

The example Schedule 3 developed for Initial System Deficiency Correction(s) / Connection Charge(s)/Transition Period (CLIN 0002) is shown in Table J40-1.5.

TABLE J40-1.5

Example 1 Schedule 3, Initial System Deficiency Correction(s) / Connection Charge(s)/Transition Period Utility Privatization

Project Name Interest

Rate

Project Cost

(Constant $)a

Project

Start

Month

First Full Month

Project will Be In

Service

Amortization

Period

(Months)

Monthly

Charge

Project 1 - Remedy Cross Connections

6.0% $125,000

12 60 $2,416.60

Transition 0.0% $5,000 0 1 $5,000

J40.1.2.4 Example 1 CLIN 0003 Recoverable Portion of the Purchase Price Supporting

The Monthly Charge for the Recoverable Portion of the Purchase Price (CLIN 0003) is calculated by amortizing the recoverable amount of the purchase price over the number of contract periods (months) the Offeror proposes to recover the purchase price.8

Party X proposes to purchase the wastewater system for $500,000.00.

Party X identifies excess capacity in the system that can potentially be used for customers other than the Government. This excess capacity is determined to be worth 15 percent of the system FMV; therefore, Party X proposes to recover $425,000.00 (85 percent of the purchase price).

The $3,586.39 monthly charge is calculated by amortizing the $425,000.00 Recoverable Portion of the Purchase Price over 15 years (180 months) at a 6.0 percent annual interest

8 The Recoverable amount cannot exceed the Purchase Price. Additionally, recovery terms (interest rate, number of periods) should be the same as used when calculating the monthly credit for the Purchase Price (CLIN 0001).

J40-15 rate (1.2 percentage points over the U.S. Treasury Bond rate of 4.8% assumed for this example)9. The $43,036.68 annual charge is calculated by multiplying the monthly credit by 12 months.

Calculation Results

(PV) Proposed Recoverable Portion of Purchase Price => $425,000.00

( n ) # Months to Amortize Recovery => 180

Annual Interest Rate => 6.00%

( i ) Monthly Interest Rate = 0.06 / 12 => 0.50%

CLIN 0003, ( A ) Monthly Charge for Purchase Price a => $3,586.39

Annual Credit for Purchase Price Less Recovery = 12 x -632.89 => $43,036.68

Table Notes:

a Monthly Credit as Payment for Purchase Price is calculated based on uniform series of payments.

A = PV x [ i x (1 + i) n ] / [ (1 + i)

TABLE J40-1.6

Example 1 Schedule 4, Recoverable Portion of Purchase Price Utility Privatization

Item Interest

Rate Amount a

Amortization Period (Months)

Monthly Charge

Recoverable Portion of

Purchase Price 6.0% $425,000 180 $3,586.39

J40.1.2.4 Example 1 CLIN 0004 Transition Period Supporting Calculations

The Transition Period charge (CLIN 0004) comes directly from Schedule 3 (TABLE J40-1.5). .

If the Contractor chooses to amortize the transition period payments, the same methodology as used to calculate the Initial System Deficiency Correction(s) / Connection Charge(s) must be used. Refer to Example 1 CLIN 0002 Supporting Calculations.

9 Source: 4.8% based on 4.93% for the 20-year U.S. Treasury Bond rate (www.federalreserve.gov/releases/H15/update/) plus the -0.13% adjustment for estimating the 30-year rate (www.treas.gov/offices/domestic-finance/debt-management/interest-

J40-16

J40.2 Example #2 [Front-end Loaded Renewals & Replacements]

The Government is considering privatization of a wastewater collection system at one of its installations. It plans to complete the privatization in year 2012, resulting in a 50-year contract for utility service. The Government has issued an RFP that, among other things, requires Offerors submitting an FP-PPR proposal to complete Schedule B-2 presented in Section B of the RFP and Schedules 1, 2, and 3 presented in section B.7 of the RFP. The

Government’s inventory of the wastewater system is shown in Table J40-2.1.

TABLE J40-2.1

Example 2 Wastewater System Inventory Utility Privatization

Component/item Size Quantity Unit Approximate Year of Installation

Concrete Pipe 4-in. 2,000 Lf 1962

Concrete Pipe 12-in. 2,000 Lf 1962

Concrete Pipe 24-in. 4,000 Lf 1962

CI Pipe 4-in. 1,000 Lf 1970

CI Pipe 12-in. 4,000 Lf 1970

PVC Pipe 4-in. 3,000 Lf 1975

PVC Pipe 12-in. 8,000 Lf 1975

PVC Pipe 24-in. 4,000 Lf 1975

PVC Pipe 4-in. 3,000 Lf 1980

PVC Pipe 12-in. 8,000 Lf 1980

PVC Pipe 24-in. 4,000 Lf 1980

Manhole 20 Ea 1960

Manhole 10 Ea 1970

Manhole 30 Ea 1975

Manhole 30 Ea 1980

Lift Station #1 1 Ea 1970

Lift Station #2 1 Ea 1975

Lift Station #3 1 Ea 1980

J40-17 meters need to be installed. The Government-recognized system deficiencies, including the approach the Government would take to remedy them if the system is not privatized, are shown in Table J40-2.2.

TABLE J40-2.2

Example 2 Government Recognized System Deficiencies Utility Privatization

System Component Description of Deficiency Type

Collection System The system has excessive infiltration and inflow (I&I) Initial System Deficiency Correction

Lift Station #2 Lift Station #2 is inappropriately sized and causes overflows of sewage into the street

Initial System Deficiency Correction

Table Notes: Deficiencies may be categorized as an Initial System Deficiency Correction, renewal and replacements and/or operation and maintenance.

J40.2.1 Example 2 Schedule B-2

Schedule B-2 is prepared based on the amortized purchase price credit and the data presented in Schedule 1, Utility Service Charge, Schedule 2, Renewals and Replacements – 50 Year Schedule, and Schedule 4, Recoverable Portion of Purchase Price. Projects shown in Schedule 3, Initial System Deficiency Correction(s) / Connection Charge(s)/Transition Period, are not included in the totals shown in Schedule B-2, but are added to the monthly charge in accordance with the amortization schedule for each Initial System Deficiency Correction(s) / Connection Charge(s)/Transition Period project. The completed Schedule B-2 for Example 2 is presented in Exhibit J40-2.1.

J40-18

Wastewater System: ____________________

$6,893.77

$2,674.49

(See B.6.3 and B.7.4 (Schedule 3)). This amount should not be included in the price offered for CLIN 0001.)

$ Varies –

See Schedule 3

0003 Recoverable Portion of Purchase Price (see B.6.4 and B.7.5

(Schedule 4). This amount should not be included in the price offered for CLIN 0001

$3,586.39

See Schedule 4

0004 Transition Period

(See B.6.5 and B.7.4 (Schedule 3). This amount should not be included in the price offered for CLIN 0001).

$5,000__ a Utility system to be filled in by the Offeror. A B-2 must be completed for each utility system offered.

Utility systems are shown in Schedule A paragraph B.3, Systems to be Privatized.

b The Offeror should enter the Utility Services Charge, as computed in Schedule 1 (see B.7.2). See B.6, Economic Price Adjustment Price Index Utility Privatization.

NOTE:

The Purchase Price, Recoverable Portion of the Purchase Price, interest rate and amortization period are

J40.2.2 Example 2 Supporting Calculations

0001, 0002, 0003 and 0004 in Schedule B-2.

J40.2.2.1 Example 2 CLIN 0001 Utility Service Charge Supporting Calculations

The Utility Service Charge (CLIN 0001) is comprised of two components – O&M and R&R.

Based on their assessment of the requirements in the RFP, their evaluation of the system, and their experience with wastewater systems, Party X determines the utility service charge

J40-19 for O&M to be $2,500.10 This amount includes all costs for operations, maintenance, repair, and associated administration and general costs. Party X is a public entity; therefore, it pays no U.S. Federal taxes.

The utility service charge for R&R is developed starting with the example Schedule 2 developed by Party X shown in Table J40-2.3. R&R project costs are entered into Schedule 2 in constant dollars. The useful life is based on Party X’s experience. The Present Value is calculated using the current Real Discount Rate, 2.7 percent as of January 2010, as published in OMB Circular A-94, Guidelines and Discount Rates for Benefit Cost Analysis of Federal Programs, Appendix C and middle of the year discounting. The Residual Value is the unrecovered investment in the utility system remaining at the end of the contract term.11 It is calculated based on the remaining useful life at the end of the contract term (% of Useful Life remaining x R&R Project Cost). The present value of the cumulative Residual Value is subtracted from the cumulative present value of R&R project costs to determine the total present value of the R&R investment.

Please note: The description of Renewal or Replacement must be specific enough to identify the exact component/item from the inventory listing. The R&R schedule for each of the inventory items is clearly delineated. As shown in Table J40-2.3 Parts 1 and the following must be clearly listed:

- The specific inventory line item (including component, size, quantity and installation date) undergoing R&R

- The type of replacement component/item if different from the original inventory item (i.e. if steel pipe is being replaced by PVC)

- The lifespan and expected replacement date(s) for the inventory line item and its replacement

- The cost per unit for the inventory line item and its replacement if different

- The impact of any Initial System Deficiency Correction(s) / Connection Charge(s) projects on the R&R schedule

10 Demonstrating how to develop the monthly charge for O&M is beyond the intent of this guidance document.

11 The Government recognizes the residual value as a Government liability at the end of the contract term representing the

J40-20

Table J40-2.3 Part 1: Example 2 Schedule 2, Renewals and Replacements – 50 Year Schedule

A B C D E F G H I J K L M

Item Size Quant Unit

Approx

Year

Installed

Existing

Unit

RCN

Existing

Item

Service Life

First

Expected

Replace Date

New

Item

New

Item

Service

Life

New Unit

Cost RCN

New

Item

RCN

Next

Replace

Dates

Row 1 Concrete Pipe 4-in. 2,000 Lf 1962 $15 50 2012 PVC 50 $10 $20,000 2062

Row 2 Concrete Pipe 12-in. 2,000 Lf 1962 $20 50 2012 PVC 50 $20 $40,000 2062

Row 3 Concrete Pipe 24-in. 4,000 Lf 1962 $60 50 2012 PVC 50 $50 $200,000 2062

Row 4 CI Pipe 4-in. 1,000 Lf 1970 $25 50 2020 PVC 50 $10 $10,000 2070

Row 5 CI Pipe 12-in. 4,000 Lf 1970 $100 50 2020 PVC 50 $20 $80,000 2070

Row 6 PVC Pipe 4-in. 3,000 Lf 1975 $10 50 2025 same 50 $10 $30,000 2075

Row 7 PVC Pipe 12-in. 8,000 Lf 1975 $20 50 2025 same 50 $20 $160,000 2075

Row 8 PVC Pipe 24-in. 4,000 Lf 1975 $50 50 2025 same 50 $50 $200,000 2075

Row 9 PVC Pipe 4-in. 3,000 Lf 1980 $10 50 2030 same 50 $10 $30,000 2080

Row 10 PVC Pipe 12-in. 8,000 Lf 1980 $20 50 2030 same 50 $20 $160,000 2080

Row 11 PVC Pipe 24-in. 4,000 Lf 1980 $50 50 2030 same 50 $50 $200,000 2080

Row 12 Manhole 20 Ea 1960 $3,500 60 2020 same 60 $3,500 $70,000 2080

Row 13 Manhole 10 Ea 1970 $3,500 60 2030 same 60 $3,500 $35,000 2090

Row 14 Manhole 30 Ea 1975 $3,500 60 2035 same 60 $3,500 $105,000 2095

Row 15 Manhole 30 Ea 1980 $3,500 60 2040 same 60 $3,500 $105,000 2100

Row 16 Lift Station #1 1 Ea 1970 $25,000 50 2020 same 50 $25,000 $25,000 2070

Row 17 LS Controls,#1 1 Ea 1970 $50,000 20 2012 same 20 $50,000 $50,000 2032, 2052

Row 18 Lift Station #2 1 Ea 1975 $25,000 50 2012* same 50 $25,000 $25,000 2062

Row 19 LS Controls #2 1 Ea 1975 $50,000 20 2012 same 20 $50,000 $50,000 2032, 2052

Row 20 Lift Station #3 1 Ea 1980 $25,000 50 2030 same 50 $25,000 $25,000 2080

Row 21 LS Controls,#3 1 Ea 1980 $50,000 20 2012 same 20 $50,000 $50,000 2032, 2052

This table represents a sample R&R plan. For display purposes, the R&R table is split into two parts. The first part shows the inventory items, the associated costs and the respective replacement costs of the replacement items, if different from the original. The second part shown in Table J40-2.3 Part 2, shows the annual cost breakouts. Impacts of Initial System Deficiency Correction(s) / Connection Charge(s) projects on inventory must be accounted for in R&R plan.

Columns A-E: Lists the original inventory description

Columns F: Details the cost at the unit level

Column G: Lists the service/design life of the existing component/item

Column H: Lists the expected replacement date. Replacement date = Approx year Installed + Service Life

Column I-J: Describes the replacement component/item and the replacement component’s service life

Columns K-L: Details the cost of the replacement component/item at the unit and total quantity levels

Column M: Lists the next expected R&R dates. Replacement date = Approx year Installed + Service Life

*Row 18: Per Table J40-2.2 Lift Station #2 is listed as a deficiency. Contractor chose to replace LS #2 via R&R in first year.

J40-21

Table J40-2.3 Part 2: Example 2 Schedule 2, Renewals and Replacements Schedule – 50 Year Schedule A B C D E F G H I J K L

Item Size

Const $

Year 1

Const $

Year 9

Const $

Year 14

Const $

Year 19

Const $

Year 21

Const $

Year 24

Const $

Year 29

Const $

Year 41

Cumulative

Total

Residual

Value Const $

Year 50

Row 1 Concrete Pipe 4-in. $20,000 $20,000 $400

Row 2 Concrete Pipe 12-in. $40,000 $40,000 $800

Row 3 Concrete Pipe 24-in. $200,000 $200,000 $4,000

Row 4 CI Pipe 4-in. $10,000 $10,000 $1,800

Row 5 CI Pipe 12-in. $80,000 $80,000 $14,400

Row 6 PVC Pipe 4-in. $30,000 $30,000 $8,400

Row 7 PVC Pipe 12-in. $160,000 $160,000 $44,800

Row 8 PVC Pipe 24-in. $200,000 $200,000 $56,000

Row 9 PVC Pipe 4-in. $30,000 $30,000 $11,400

Row 10 PVC Pipe 12-in. $160,000 $160,000 $60,800

Row 11 PVC Pipe 24-in. $200,000 $200,000 $76,000

Row 12 Manhole $70,000 $70,000 $22,167

Row 13 Manhole $35,000 $35,000 $16,917

Row 14 Manhole $105,000 $105,000 $59,500

Row 15 Manhole $105,000 $105,000 $68,250

Row 16 Lift Station #1 $25,000 $25,000 $4,500

Row 17 LS Controls #1 $50,000 $50,000 $50,000 $150,000 $27,500

Row 18 Lift Station #2* $25,000 $25,000 $500

Row 19 LS Controls #2 $50,000 $50,000 $50,000 $150,000 $27,500

Row 20 Lift Station #3 $25,000 $25,000 $9,500

Row 21 LS Controls #3 $50,000 $50,000 $50,000 $150,000 $27,500

Row A Total Const $ $435,000 $185,000 $390,000 $450,000 $150,000 $105,000 $105,000 $150,000 $1,970,000 $542,633

Row B Present Values $429,244 $147,511 $272,185 $274,890 $86,875 $56,141 $49,140 $50,990 $1,366,976 $145,134

This is the second part of the R&R schedule. It shows the annual R&R totals for each inventory line item.

Columns A-B: Lists original inventory as described in Part 1

Columns C-J: Corresponds to the year that R&R occurs. In accordance with B.5.2.1, dollar amounts are in constant year dollars based on the expected price levels during the first two years of the utility privatization service contract.

Column K: Totals of Columns C-J

Column L: The Residual Value (RV) is the value of the investment, in constant year dollars, at the end of the contract term. RV = Future Value x (Contract Year item installed + Design Life – Remaining Contract length) / Design Life. Contract Year is 1thru 50.

See Table J40-1.3 Part 2 for example of Residual Value calculation

Row A: Lists the R&R totals in Const $per column

Row B: Present Value of Row A, where Present Value = Future Value x [ 1 / (1 + i)^n ] with Future Value is the R&R cost in const year dollars, i = the current Real (constant dollar) Discount Rate, 2.7%, as published in OMB Circular A-94, Appendix C (see for most recent rate) and n representing middle of the year discounting (i.e 2012 is year one so n = 0.5, in 2013 n =1.5 and so on)

*Row 18: Per Table J40-2.2 Lift Station #2 is listed as a deficiency. Contractor chose to replace LS #2 via R&R in first year.

J40-22

As shown in Table J40-2.3, Party X proposes to spend $1,970,000 (in constant year dollars) on planned R&R over the 50-year contract term. The cumulative present value of R&R investments is $1,366,976 using the 2.7 percent Real Discount Rate published in January 2010 OMB Circular A-94, Guidelines and Discount Rates for Benefit Cost Analysis of Federal Programs, Appendix C, and middle of the year discounting. The cumulative residual value at the end of the contract term is $542,633. The present value of the cumulative residual value is $145,134. Therefore, the present value of Party X’s total investment in R&R during the contract term is $1,221,842 (=$1,366,976- $145,134).12

Exhibit J40-2.2 shows the projected R&R investment by year. This chart shows a distribution of investments (costs) over the entire 50-year term of the contract, with a heavy concentration of early investments.

EXHIBIT J40-2.2

Example 2 Renewals and Replacements Investment by Year

Investment in R&R ($1,221,842) over 600 months, using an interest rate that results in a monthly charge sufficient for Party X to pay for all of its R&R investments. It is important to emphasize that the interest rate must be carefully chosen. Some of the key factors that must be considered include the timing of investments (e.g., distributed, front-end loaded or back-end loaded) and the source(s) of capital to be used (borrowed funds, internal capital, an "escrow account," etc.). The basis (reasoning) for the interest rate chosen must be documented in, or as supporting documentation to, the proposed schedules. Based on the timing of the investments as shown in Exhibit J40-2.2, and their access to capital and financing, Party X uses a 3.60 percent annual interest rate to develop their utility service

12 The present value of the cumulative residual value is subtracted from the present value of R&R investments to account for

Sum of R&R Project Cost (Constant Dollars)

$0 $50,000

$100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000

J40-23

Present Value of Proposed R&R Cost (from Schedule 2) => $1,366,976.13

Cumulative Residual Value due to R&R Investments (from Schedule 2) => $145,134.12

( PV ) Present Value of Total Investment in R&R = 1,366,976.13 - 145,134.12 => $1,221,842.01

( n ) # Months to Recover R&R Cost => 600

Annual Interest Rate => 3.60%

( i ) Monthly Interest Rate = 0.0360 / 12 => 0.30%

( A ) Monthly R&R Charge a => $4,393.77

Table Notes:

a Monthly R&R Charge calculated based on uniform series of payments. A = PV x [ i x (1 + i) n ] / [ (1 + i) n

– 1 ]

Exhibit J40-2.3 shows the projected income and cost based on Party X’s utility service charge for R&R and Schedule…