J40_Example_FP-PPR.pdf

COMPETITIVE RFP TEMPLATE UTILITIES PRIVATIZATION

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ATTACHMENT J40

Example Completion of Schedules for FP-PPR Type Contracts

TABLE OF CONTENTS

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

EXAMPLE COMPLETION OF SCHEDULES FOR FP-PPR TYPE CONTRACTS

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

J40.1.1 EXAMPLE 1 SCHEDULE B-4

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-4

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 2 CLIN 0001 Monthly Credit as Payment for Purchase Price Supporting Calculations J40.2.2.3 Example 2 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-4

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 Monthly Credit as Payment for Purchase Price Supporting Calculations J40.3.2.3 Example 3 CLIN 0002 Initial System Deficiency Corrections/Connection Charges Supporting Calculations J40.3.2.4 Example 3 CLIN 0003 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

COMPETITIVE RFP TEMPLATE

ATTACHMENT J40

Example Completion of Schedules for FP-PPR Type Contracts

The objective of this document is to illustrate through examples how to complete the required schedules in the request for proposal (RFP) for a Fixed Price - Prospective Price Redetermination (FP-PPR) type contract. The schedules covered in these examples are Schedule B-4, Payment by the Government for Utility Service, 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-PPR 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 the FP-PPR 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 should 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 should also transparently reflect the Offeror’s assumptions regarding the Contractor’s cost of capital for funding these replacements. (For example, the Offeror should 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-4 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.

The Government anticipates that pricing for each redetermination period will be accomplished in substantial part by recomputing their schedules for the remainder of the contract term in accordance with the J40 methodology. Contractors will be expected to

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 make explicit and justify assumptions regarding prices of material, interest rates, provision of capital and other relevant components.

Any proposal utilizing Schedule B-4 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 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 two years of operation. The effect of price inflation on costs incurred in years subsequent to the first 2 years of operation will be considered as part of the price redetermination process.

4. Contract time line definitions:

• Contract Award Date (CAD) =Date contract is awarded

• Contract Start Date (CSD) = CAD + Transition Period

• First Redetermination Date (R1) = CSD + 2 years

• Year Dollar used as basis for inflation at R1 = CSD + 1 Year

• After first redetermination, redetermination occurs every 3 Years

• Year dollar for subsequent redeterminations is the mid-point between the redetermination dates

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 2007, resulting in a 50-year contract for utility service. The Government has issued an RFP that, among other things, requires Offerors to complete Schedule B-4 presented in Section B.4 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 1957

Concrete Pipe 12-in. 2,000 Lf 1957

Concrete Pipe 24-in. 4,000 Lf 1957

CI Pipe 4-in. 1,000 Lf 1970

CI Pipe 12-in. 4,000 Lf 1970

PVC Pipe 4-in. 3,000 Lf 1985

PVC Pipe 12-in. 8,000 Lf 1985

PVC Pipe 24-in. 4,000 Lf 1985

PVC Pipe 4-in. 3,000 Lf 2000

PVC Pipe 12-in. 8,000 Lf 2000

PVC Pipe 24-in. 4,000 Lf 2000

Manhole 20 Ea 1957

Manhole 10 Ea 1970

Manhole 30 Ea 1985

Manhole 30 Ea 2000

Lift Station #1 1 Ea 1970

Lift Station #2 1 Ea 1985

Lift Station #3 1 Ea 2000

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.

J40-4

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-4 Schedule B-4 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-4, 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-4 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:

$5,971.72

($4,219.28)

$1,752.44__

0002 Initial System Deficiency Corrections / Connection Charges – (see B.6.3 and B.7.4 (Schedule 3). This amount should not be included price Offered for CLIN 0001.)

$Varies –

See Schedule 3

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Installation name, State Wastewater System: ____________________

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 $5,000__ a Utility system to be filled in by the Offeror. A B-4 must be completed for each utility system offered.

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

b The Offeror should enter the Utility Service Charge, as computed in Schedule 1 (see B.7.2).

NOTE:

The Purchase Price, Recoverable Portion of the Purchase Price, interest rate and amortization period a 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 Schedule B-4.

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, 3.0 percent as of January 2007, 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 and 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

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 1957 $15 50 2007 PVC 50 $10 $20,000 2057 Row 2 Concrete Pipe 12-in. 2,000 Lf 1957 $20 50 2007 PVC 50 $20 $40,000 2057 Row 3 Concrete Pipe 24-in. 4,000 Lf 1957 $60 50 2007 PVC 50 $50 $200,000 2057 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 1985 $10 50 2035 same 50 $10 $30,000 2085 Row 7 PVC Pipe 12-in. 8,000 Lf 1985 $20 50 2035 same 50 $20 $160,000 2085 Row 8 PVC Pipe 24-in. 4,000 Lf 1985 $50 50 2035 same 50 $50 $200,000 2085 Row 9 PVC Pipe 4-in. 3,000 Lf 2000 $10 50 2050 same 50 $10 $30,000 2100

Row 10 PVC Pipe 12-in. 8,000 Lf 2000 $20 50 2050 same 50 $20 $160,000 2100 Row 11 PVC Pipe 24-in. 4,000 Lf 2000 $50 50 2050 same 50 $50 $200,000 2100 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 1985 $3,500 60 2045 same 60 $3,500 $105,000 2105 Row 15 Manhole 30 Ea 2000 $3,500 60 2060 same 60 $3,500 $105,000 2120 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 2007 same 20 $50,000 $50,000 2027, 2047 Row 18 Lift Station #2 1 Ea 1985 $25,000 50 2007* same 50 $25,000 $25,000 2057 Row 19 LS Controls #2 1 Ea 1985 $50,000 20 2007 same 20 $50,000 $50,000 2027, 2047 Row 20 Lift Station #3 1 Ea 2000 $25,000 50 2050 same 50 $25,000 $25,000 2100 Row 21 LS Controls,#3 1 Ea 2000 $50,000 20 2020 same 20 $50,000 $50,000 2040 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 50 Row 1 Concrete Pipe 4-in. $20,000 $20,000 $0 Row 2 Concrete Pipe 12-in. $40,000 $40,000 $0 Row 3 Concrete Pipe 24-in. $200,000 $200,000 $0 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 $0 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 $827,433 Row B Present Values $379,352 $157,676 $54,555 $17,474 $167,959 $18,575 $33,648 $30,206 $114,717 $974,161 $191,554

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, 3.0%, as published in OMB Circular A-94, Appendix C (see for most recent rate) and n representing middle of the year discounting (i.e 2007 is year one so n = 0.5, in 2008 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.

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 $974,162, using the 3.0 percent Real Discount Rate published in January 2007 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 $827,433. The present value of the cumulative residual value is $191,554. Therefore, the present value of Party X’s total investment in R&R during the contract term is $782,608 ($974,162 - $191,554).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

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

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 ($782,608) 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 4.85 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.

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Calculation Result

Present Value of Proposed R&R Cost (from Schedule 2) => $974,161.90

Cumulative Residual Value due to R&R Investments (from Schedule 2) => $191,553.63

( PV ) Present Value of Total Investment in R&R = 974,161.90 – 191,553.63 => $782,608.27

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

Annual Interest Rate => 4.85%

( i ) Monthly Interest Rate = 0.0485 / 12 => 0.40%

( A ) Monthly R&R Charge a => $3,471.72

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 Utility Privatization

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

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.

J40-11

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

2. Renewals and Replacements (R&R) $3,471.72 Total Utility Service Charge

(to be entered into CLIN 0001 for Schedule B-4) $5,971.72

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 Pricea => $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).

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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 1950s-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 1985), 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 1957-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:

J40-13

(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

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 rate (1.2 percentage points over the U.S. Treasury Bond rate of 4.8% assumed for this

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).

J40-14 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 Pricea => $3,586.39

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

Table Notes:

TABLE J40-1.6

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

Item Interest Rate

Amount (Constant $)a

First Full Month

Project will Be In Service

Amortization

Period

(Months)

Monthly Charge

Recoverable Portion of Purchase Price

6.0% $425,000 N/A 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-

J40-15

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 2007, resulting in a 50-year contract for utility service. The Government has issued an RFP that, among other things, requires Offerors to complete Schedule B-4 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 1957

Concrete Pipe 12-in. 2,000 Lf 1957

Concrete Pipe 24-in. 4,000 Lf 1957

CI Pipe 4-in. 1,000 Lf 1965

CI Pipe 12-in. 4,000 Lf 1965

PVC Pipe 4-in. 3,000 Lf 1970

PVC Pipe 12-in. 8,000 Lf 1970

PVC Pipe 24-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

Manhole 20 Ea 1955

Manhole 10 Ea 1965

Manhole 30 Ea 1970

Manhole 30 Ea 1975

Lift Station #1 1 Ea 1965

Lift Station #2 1 Ea 1970

J40-16

TABLE J40-2.1

Example 2 Wastewater System Inventory Utility Privatization

Component/item Size Quantity Unit Approximate Year of Installation

Lift Station #3 1 Ea 1975 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-4 Schedule B-4 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-4, 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-4 for Example 2 is presented in Exhibit J40-2.1.

J40-17

Wastewater System: ____________________

CLINS SUPPLIES/SERVICES MONTHLY SERVICE

CREDIT/CHARGE

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

$6,532.60

$2,313.32__

(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 $5,000__ a Utility system to be filled in by the Offeror. A B-4 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 Service Charge, as computed in Schedule 1 (see B.7.2).

NOTE:

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

J40.2.2 Example 2 Supporting Calculations

0001, 0002, 0003 and 0004 in Schedule B-4.

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

J40-18 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, 3.0 percent as of January 2007, 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

J40-19

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 1957 $15 50 2007 PVC 50 $10 $20,000 2057 Row 2 Concrete Pipe 12-in. 2,000 Lf 1957 $20 50 2007 PVC 50 $20 $40,000 2057 Row 3 Concrete Pipe 24-in. 4,000 Lf 1957 $60 50 2007 PVC 50 $50 $200,000 2057 Row 4 CI Pipe 4-in. 1,000 Lf 1965 $25 50 2015 PVC 50 $10 $10,000 2065 Row 5 CI Pipe 12-in. 4,000 Lf 1965 $100 50 2015 PVC 50 $20 $80,000 2065 Row 6 PVC Pipe 4-in. 3,000 Lf 1970 $10 50 2020 same 50 $10 $30,000 2070 Row 7 PVC Pipe 12-in. 8,000 Lf 1970 $20 50 2020 same 50 $20 $160,000 2070 Row 8 PVC Pipe 24-in. 4,000 Lf 1970 $50 50 2020 same 50 $50 $200,000 2070 Row 9 PVC Pipe 4-in. 3,000 Lf 1975 $10 50 2025 same 50 $10 $30,000 2075

Row 10 PVC Pipe 12-in. 8,000 Lf 1975 $20 50 2025 same 50 $20 $160,000 2075 Row 11 PVC Pipe 24-in. 4,000 Lf 1975 $50 50 2025 same 50 $50 $200,000 2075 Row 12 Manhole 20 Ea 1955 $3,500 60 2015 same 60 $3,500 $70,000 2075 Row 13 Manhole 10 Ea 1965 $3,500 60 2025 same 60 $3,500 $35,000 2085 Row 14 Manhole 30 Ea 1970 $3,500 60 2030 same 60 $3,500 $105,000 2090 Row 15 Manhole 30 Ea 1975 $3,500 60 2035 same 60 $3,500 $105,000 2095 Row 16 Lift Station #1 1 Ea 1965 $25,000 50 2015 same 50 $25,000 $25,000 2065 Row 17 LS Controls,#1 1 Ea 1965 $50,000 20 2007 same 20 $50,000 $50,000 2027, 2047 Row 18 Lift Station #2 1 Ea 1970 $25,000 50 2007* same 50 $25,000 $25,000 2057 Row 19 LS Controls #2 1 Ea 1970 $50,000 20 2007 same 20 $50,000 $50,000 2027, 2047 Row 20 Lift Station #3 1 Ea 1975 $25,000 50 2025 same 50 $25,000 $25,000 2075 Row 21 LS Controls,#3 1 Ea 1975 $50,000 20 2007 same 20 $50,000 $50,000 2027, 2047 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.

J40-20

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 $0 Row 2 Concrete Pipe 12-in. $40,000 $40,000 $0 Row 3 Concrete Pipe 24-in. $200,000 $200,000 $0 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 $0 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 $536,933 Row B Present Values $428,618 $143,898 $261,675 $260,450 $81,833 $52,422 $45,220 $45,309 $1,319,425 $124,302

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.

• 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, 3.0%, as published in OMB Circular A-94, Appendix C (see for most recent rate) and n representing middle of the year discounting (i.e 2007 is year one so n = 0.5, in 2008 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.

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 $1,319,425 using the 3.0 percent Real Discount Rate published in January 2007 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 $536,933. The present value of the cumulative residual value is $124,302. Therefore, the present value of Party X’s total investment in R&R during the contract term is $1,195,123 ($1,319,425- $124,302).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 Utility Privatization

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

Investment in R&R ($1,195,123) 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 3.25 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

J40-22

Present Value of Proposed R&R Cost (from Schedule 2) => $1,319,424.76

Cumulative Residual Value due to R&R Investments (from Schedule 2) => $124,301.89

( PV ) Present Value of Total Investment in R&R = 1,319,424.76 - 124,301.89 => $1,195,122.87

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

Annual Interest Rate => 3.25%

( i ) Monthly Interest Rate = 0.0325 / 12 => 0.27%

( A ) Monthly R&R Charge a => $4,032.60

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 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.13 It is incumbent upon the Offeror to consider all pertinent factors when developing their schedules, to include the resulting forecast of income and costs.14

13 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?

14 The Government would expect the residual value to be part of the subsequent contract for utility service (after the 50 year

J40-23

EXHIBIT J40-2.3

Example 2 Income and Cost Forecast by Year Utility Privatization

Income and Cost Forecast

$1,000,000.00

$800,000.00

$600,000.00

$400,000.00

$200,000.00

$0.00

$200,000.00

$400,000.00

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

Year

Income demonstrated in the example Schedule 1 shown in Table J40-2.4.

TABLE J40-2.4

Example 2 Schedule 1, Utility Service Charge Utility Privatization

Component Monthly Charge

1. Operations and Maintenance (O&M) $2,500

2. Renewals and Replacements $4,032.60

(to be entered into CLIN 0001 for Schedule B-4) $6,532.60

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

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…