Economic Analysis for Water Recycling in California

Nathan Burley, Josue Medellin-Azuara, Sachi De Souza, Jay Lund, Richard Howitt

University of California, Davis

OutlineEATF and Guidance

DocumentEconomic AnalysisFinancial AnalysisAllocation of costs

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Economic Analysis Task Force (EATF)Process to discuss economic analysis in water

recycling and draft EATF productsProducts

Economic Analysis Guidance DocumentBeneficiary Pays AnalysisSpreadsheets for

Screening level project analysis Economic analysis Financial analysis Beneficiary pays (SCRB methods)

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Economic Analysis GuidanceDocument Structure

Integrated water resources planning Economic AnalysisFinancial AnalysisBeneficiary PaysWorked ExamplesAppendix

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 4

Integrated Water Resources Planning

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Economic Analysis Outline

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Financial Analysis Outline

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Identify and Estimate Costs

Develop Capital Financing

Mechanisms

Design Revenue Scheme

Allocate Financial Costs

Purpose A

User

Purpose B

User

User

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

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Cost Allocation - Beneficiary PaysSeparable Costs, Remaining Benefits Approach

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Establish Baseline

Specify project alternatives

Recommend Projectand Plan Implementation

Assess Financial and Other Feasibility

EconomicAnalysis(Chapter 3)

Define project objectives

Feasible

Assess Economic Feasibility

Non Feasible

Chapter 2

Conduct Economic Analysis

Conduct Financial Analysis

Planning Process

Allocation of benefits and costs is determined from the economic analysis

Economic Analysis

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Economic Analysisselect accounting perspective (state-wide, regional...)

Complete for Each Alternative...

Complete for Each Point of View...Identify Benefits and CostsQuantify Benefits and Costs Evaluate ProjectComplete 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

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Economic Analysis – Identify Benefits and Costs

EnvironmentRestorationDownstream habitatSource water

protectionAir quality (GHGs)

RecreationGW

balance/protection

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Economic Analysis – Quantify Benefits and Costs

Market PricesNon-market valuation

Expressed PreferenceRevealed preferenceBenefits transfer

Constant dollars – corrected for inflation

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Economic Analysis – EvaluationExpected Net Present Value (ENPV)

= ∑ Pi ∑ ∑ (Bi,j,t – Ci,j,t) (1 +d)-t

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Where: • Pi = probability of event i• Bi jt = monetized benefit for item j at time t, for event i• Ci jt = monetized cost for item j at time t, for event i• d = discount rate (corrected for inflation• t = time

event item time

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Economic Analysis – Summarize Net Benefits, Compare Alternatives

Comparison of Project AlternativesRank Alternative Net 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 RECYCLINGPoint of View Net 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

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Establish Baseline

Specify project alternatives

Recommend Projectand Plan Implementation

Assess Financial and Other Feasibility

EconomicAnalysis(Chapter 3)

Define project objectives

Feasible

Assess Economic Feasibility

Non Feasible

Chapter 2

Conduct Economic Analysis

Conduct Financial Analysis

Planning Process

Financial Analysis

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Identify and Estimate Costs

Develop Capital Financing

Mechanisms

Design Revenue Scheme

Allocate Financial Costs

Purpose A

User

Purpose B

User

User

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)

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Total Project Cost

Total Cost Per User

Joint CostsProportional to

remaining benefits for each

user/purpose

Separable Costspaid by each

user, calculate by excluding each

purpose

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Allocation of Costs Agency A Agency B Agency C Total

Net Benefits $40,000,000 $20,000,000 $10,000,000 70,000,000Alternative Cost (Least Cost Alternative) 30,000,000 9,000,000 15,000,000

Justifiable Cost (lesser of benefits and alternative cost) 30,000,000 9,000,000 10,000,000

Separable Costs (must be less than Justifiable costs) 5,000,000 4,000,000 3,000,000 12,000,000

Remaining Justifiable Cost 25,000,000 5,000,000 7,000,000 37,000,000

Percent (distribution of remaining justifiable costs) 68% 14% 18% 100%

Allocated Joint Costs 22,440,000 4,620,000 5,940,000 33,000,000

Total Allocated Costs (separable costs plus allocated joint costs) 27,440,000 8,620,000 8,940,000 45,000,000

Percent of Total Costs 61% 19% 20% 100%

ex: total project cost = $45M

Summary and ConclusionsEconomic Analysis

Time consumingNot as widely used Broader perspective

Financial AnalysisTraditional project analysis

approachLimited perspective

Best when used together

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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

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END