Nathan Burley, Josue Medellin-Azuara, Sachi De Souza, Jay Lund, Richard Howitt University of California, Davis

Outline EATF and Guidance Document Economic Analysis Financial Analysis Allocation of costs 1

Economic Analysis Task Force (EATF) Process to discuss economic analysis in water recycling and draft EATF products Products Economic Analysis Guidance Document Beneficiary Pays Analysis Spreadsheets for Screening level project analysis Economic analysis Financial analysis Beneficiary pays (SCRB methods) 2

Economic Analysis Guidance Document Structure Integrated water resources planning Economic Analysis Financial Analysis Beneficiary Pays Worked Examples Appendix Discount rate Data verification and cost estimations Least Cost Planning Model (reliability) CALVIN, SWAP (water supply, agricultural production) Reference benefits and costs Formulae, glossary and resources 3

Integrated Water Resources Planning 4

Economic Analysis Outline 5

Financial Analysis Outline 6 Identify and Estimate Costs Identify and Estimate Costs Develop Capital Financing Mechanisms Design Revenue Scheme Allocate Financial Costs Purpose A User Purpose B User Bonds Loans

Economic vs Financial Analysis ECONOMIC ANALYSIS FINANCIAL ANALYSIS Do project benefits exceed its costs for California? Purpose – compare alternatives based on benefits and costs Broader perspective, numerous points-of-view Will project make money? Is it affordable? Purpose – determine project’s financial feasibility Cash flow and debt payments Water and wastewater rates Narrower perspective, project proponent only 7

Cost Allocation - Beneficiary Pays Separable Costs, Remaining Benefits Approach 8

9 Planning Process Allocation of benefits and costs is determined from the economic analysis

Economic Analysis 10 Economic Analysis select accounting perspective (state-wide, regional...) Complete for Each Alternative... Complete for Each Point of View... Identify Benefits and Costs Quantify Benefits and Costs Evaluate Project Complete Sensitivity Analysis Summarize Net Benefits Compare Alternatives and Select Alternative

Economic Analysis Accounting Perspective  How wide of a net do you cast? Alternatives Points-of-View – Water Supply – Wastewater – Customers – Economy/State – Environment – Recreation 11

Economic Analysis – Identify Benefits and Costs Environment Restoration Downstream habitat Source water protection Air quality (GHGs) Recreation GW balance/protection 12

Economic Analysis – Quantify Benefits and Costs Market Prices Non-market valuation Expressed Preference Revealed preference Benefits transfer Constant dollars – corrected for inflation 13

Economic Analysis – Evaluation Expected Net Present Value (ENPV) = ∑ P i ∑ ∑ (B i,j,t – C i,j,t ) (1 +d) -t 14 Where: P i = probability of event i B i jt = monetized benefit for item j at time t, for event i C i jt = monetized cost for item j at time t, for event i d = discount rate (corrected for inflation t = time event itemtime

15 Economic Analysis – Summarize Net Benefits, Compare Alternatives Comparison of Project Alternatives RankAlternativeNet Benefit 1Water Transfers$230,000,000 2Recycling$191,280,000 3Additional Conservation$150,000,000 4Addition Purchases$30,000,000 5Desalination Plant-$50,000,000 6Surface Water Storage-$70,000,000 7 Without Project-$450,000,000 Summary of Net Benefits (for each user and purpose) - WATER RECYCLING Point of ViewNet Benefit Water Supply A$131,800,000 Waste Water A$50,000,000 Waste Water B$10,000,000 Industrial Customers-$520,000 Non-Participant Agency-$185,000 Total$191,280,000

16 Planning Process

Financial Analysis 17 Identify and Estimate Costs Identify and Estimate Costs Develop Capital Financing Mechanisms Design Revenue Scheme Allocate Financial Costs Purpose A User Purpose B User Bonds Loans SCRB Approach from Economic Analysis

Cost Allocation (SCRB) Separable Cost Remaining Benefits Based on benefits of each purpose and user (estimated in the economic analysis) 18 Total Project Cost Total Cost Per User Joint Costs Proportional to remaining benefits for each user/purpose Separable Costs paid by each user, calculate by excluding each purpose

Allocation of Costs 19 Agency AAgency BAgency CTotal Net Benefits$40,000,000$20,000,000$10,000,00070,000,000 Alternative Cost (Least Cost Alternative)30,000,0009,000,00015,000,000 Justifiable Cost (lesser of benefits and alternative cost)30,000,0009,000,00010,000,000 Separable Costs (must be less than Justifiable costs)5,000,0004,000,0003,000,00012,000,000 Remaining Justifiable Cost25,000,0005,000,0007,000,00037,000,000 Percent (distribution of remaining justifiable costs)68%14%18%100% Allocated Joint Costs 22,440,0004,620,0005,940,00033,000,000 Total Allocated Costs (separable costs plus allocated joint costs)27,440,0008,620,0008,940,00045,000,000 Percent of Total Costs61%19%20%100% ex: total project cost = $45M

Summary and Conclusions Economic Analysis Time consuming Not as widely used Broader perspective Financial Analysis Traditional project analysis approach Limited perspective Best when used together 20

PUC Rulemaking Issues & Questions “Issues Related to Inter-agency Coordination” Common analysis approach leads to easier communication & negotiations “Issues Regarding Environmental Matters” Good reason to use EATF approach 21 END