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4. COST ALLOCATION, FINANCING AND OTHER TACTICAL OPTIONS
This section identifies and describes the range of tactical options identified by KPMG for the
Authority. These options are presented for background purposes and can be integrated within
the strategic/ownership scenarios presented in Section 5 for Board evaluation. The key topics
covered in this section include:
* Water supply cost and entitlement
* Financing options
* Valuation for acquisition of member facilities
Cost and Entitlement Options
The pricing of water utility services is frequently a critical factor in securing support of a
regional utility concept. In addition, the pricing mechanism must support the vision and
mission of the utility and correspond to recognized industry pricing practices. Portions of the
Authority's vision and mission particularly applicable to the pricing process include operating
in an "economically sound manner" from the mission statement and the need for "equitable
prices" coming from workshops on the vision of the Authority.
There are many methods for recovery of capital and operating costs through rates, fees and
chargebacks which are accepted within the water utility industry. The range of cost recovery
options, while broad for retail water services, is more limited when applied to a wholesale water
utility. There are two generally recognized industry pricing concepts to use in regional
wholesale utilities: project cost pricing and average cost pricing. Subscription orproject cost
pricing recovers cost by apportioning the cost of each facility in the system to specific
customers who use that facility. System-wide or average cost pricing uses the average cost of
all facilities and recovers costs from customers based on their use of the services) provided by
the entire system. Pricing methods, particularly when applied to capital cost recovery, are often
controversial (and most critical) since they may imply customer ownership and/or rights.
Cost recovery principles can be uniformly or selectively applied to various utility functions or
services. For the Authority, these functions or services could include:
* Future supply development. Projects related to adding capacity for future customers or
Rotational aspects of supply development. Projects, such as interconnections or loops that
add system reliability and peaking capacity
System improvements and upgrades. Costs related to any non-growth improvement /
replacement to the system (e.g., needs for enhanced water quality or regulatory
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* Historical capital or facility costs. Costs related to acquisition or transfer of member
facilities to the Authority
* Capacity required from permit reductions. Costs of developing additional supplies to
substitute for wellfield permit reductions.
Using the subscription method, each participating party determines its own needs for a
proposed water supply project, supports development of the project with the Authority, and
pays a proportional amount (i.e., allocation) of the total costs. The member receives a capacity
entitlement for its committed allocation of total project cost in that project. Typically, each
new increment of water supply is offered by the Authority and subscribed to by the interested
members. Thus, the projects must be economically and technically attractive to "subscribe"
members. This concept uses a market pricing approach (and marginal costs) to add the lowest
cost unit of capacity to the system.
Financing of the costs may be provided by the member governments or by the Authority with
bond debt service assigned based on the capacity allocations. Operations and maintenance
costs are generally shared among users based on proportional use of the new project. A new
contract may be written for each new major project, resulting in a range of financing, costs and
water entitlements being accumulated over time. The Authority's Regional System Contract
follows this concept in assigning cost and capacity among members.
Under a system-wide method of cost recovery, all or a portion of costs are pooled and
uniformly recovered based on overall use of the system. A uniform, average rate per unit of
consumption is applicable to the customers to equally pay the costs of existing or new supplies.
The basic premise of the system-wide method is that each customer of the utility should pay the
same unit price for the same service provided. Generally, individual entitlements for water
capacity in projects or the system are not provided, but the Authority ensures capacity
availability for all customers. The Authority would finance the improvements and recover the
debt service with a uniform rate applied to each member's usage / commitment.
The system-wide approach addresses growth, peaking capacity and reliability from the
perspective of the overall system. Members can still recover the growth portion of the system-
wide costs from their retail customers through impact fees on new development. These impact
fees can then be used to offset unit costs to existing customers.
Use of average pricing on a component basis also allows customization to best suit local
circumstances including examples such as:
Ssystem-wide capacity cost allocations (e.g., based on maximum day usage over the past 5
years) would provide a surrogate for growth and allow annual adjustments of capacity
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* rate (s) based on operations and maintenance costs; so that the price is related to the
customer's usage of water; or
* use of take or pay provision (entitlements) to reserve resource commitments for customers
and to assign the cost of system expansion to those requesting added service.
The system-wide approach may be applied to a portion of the Authority's costs, in addition to
being applied to all capital and operating costs.
KPMG experience indicates a trend away from the subscription or project cost method. The
growing use of the system-wide or average cost methods has been demonstrated in both
connected and non-connected regional and state-wide water systems. The reasons for this trend
away from project costing are varied but include:
* subscription may not support a regional utility concept containing differing supplies and
* administrative complexity and costs are higher,
* variations in prices among customers and for a customer over time are more pronounced,
* overall system resources may not be efficiently and economically utilized.
O&M cost recovery
Operations and maintenance (O&M) costs primarily result from existing customer use and are
recovered from consumption charges. Recovery of these costs can depend on the capital cost
methodology whether subscription or system-wide:
* Ifsubscription: Each inter-local contract may establish separate O&M costs and rates
based on actual use only of the related facilities.
* If system-wide: All O&M costs are pooled and distributed using a uniform rate and actual
use by member jurisdiction.
The Authority could be faced with financing substantial costs related to acquisition of member
facilities as well as future supply development. Historically, the Authority and its members
have used long-term bonds to pay for supply development. Financial incentives from
SWFWMD programs are oriented toward alternative supply development (versus traditional
ground and surface water sources). Legislative authority for basin board millage funding (if
mandated) could potentially be directed toward acquisition costs to reduce cost impacts from
purchasing existing facilities.
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Brief descriptions of various funding options are provided for the following:
SWFWMD Governing And Basin Board funding
Cooperative funding program
New Water Sources Initiative program
Save Our Rivers/Preservation 2000 fund
Legislative taxing authority
State Revolving Fund (SRF) loan
Authority and member debt
SWFWMD Governing And Basin Board Funding
The Southwest Florida Water Management District (SWFWMD) is geographically divided into
nine major watershed basins covering approximately 10,000 square miles. Each basin has a
board whose members are appointed by the Governor and confirmed by the Florida Senate to
renewable three-year terms. The basin boards are primarily responsible for identifying the
water-related concerns and problems within their areas, and for adopting budgets to support
those concerns and fund resolution of the problems.
Chapter 373.503, Florida Statutes, authorizes Water Management Districts to levy ad valorem
taxes to support their efforts. Under this Statute, SWFWMD's Governing board may tax up to
0.500 of a mill to fund regulatory activities and projects of District-wide significance. As
shown in the exhibit below, at the 1997 millage of 0.422, the three county area provides $27
million of SWFWMD's total budget.
SWFWMD's Governing Board Funding Summary
County Tax Base FY '97 FY'97 Total Funding FY
Hillsborough County $ 25,828,404,271 0.422 $ 10,899,587
Pinellas County $ 30,925,172,321 0.422 $ 13,050,423
Pasco County $ 7.275.301.161 0.422 $ 3,070.177
Sub total $ 64,028,877,753 $ 27,020,186
Other Counties $ 57,706.967,710 0.422 $ 24,352 340
Total 5S 121,735,845.463 S 51,372,527
The Statute also allows each of SWFWMD's Basin Boards to levy ad valorem tax up to 0.50
mill to support projects undertaken within, or directly affecting, their individual areas. These
funds, which amount to a maximum of $0.50 per $1,000 of assessed property value, may be
spent only on efforts which are directly benefit the basin where the money is collected. Once a
basin board adopts a budget, it requests the Governing board to levy the necessary ad valorem
tax within its area.
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Local basin projects are sponsored either under the Cooperative Funding Program (projects
selected by the Basin Board and costs shared with recipient) or as a Basin Initiative (Board can
identify own projects to fund with or without a local partner).
SWFWMD's River Basin Board Funding Summary
River Basin Tax Base FY '97 FY '97 Total Funding FY
Hillsborough County $ 5,191,836,262 Q240 $ 1,246,041
Hillsborough County $ 12,059,324,054 0.285 $ 3,436,907
Pasco County $ 1,641,631,417 0.285 $ 467,865
Northwest Hillsborough $ -
Hillsborough County $ 8,577,243,955 0.268 $ 2,298,701
Coastal River $
Pasco County $ 3,764,168,237 0.235 $ 884,580
Pinellas-Anclote River $
Pasco County $ 1,339,817,850 0.401 $ 537,267
Pinellas County $ 30,925,172,321 0.401 $ 12,400,994
Withlacoochee River $ -
Pasco County $ 529,683,657 0.298 $ 157,846
Total River Basin $ 64,028,877,753 $ 20,184,160
As illustrated in Exhibit 4-2 above, the tri-county area falls into six different basins and each
basin board levies different millage within the maximum allowable level, whereas, the
governing board assesses a uniform millage.
New Water Sources Initiative Program. The "New Water Sources Initiative" program was
adopted by the Governing Board of the SWFWMD. The purpose of this fund is to enhance
financial assistance opportunities for "alternative" water source projects such as conservation,
reclaimed water and stormwater reuse, surface water, and desalination. The Governing board
allocates $10 million dollars per year as a funding source for eligible New Water Sources
Initiative (NWSI) projects, and basin boards receiving benefits from the projects match the $10
NWSI funding is available to those projects which have regional water resource benefits. All
eligible NWSI projects generally receive 25% of their funding from the Governing board, 25%
from the appropriate basin boardss, and the remaining 50% from the local cooperator(s). A
number of projects from the Authority's Master Water Plan may be eligible for NWSI funding.
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As of 1995, the NWSI program has budgeted expenditures for 16 projects totaling $107 million
which includes a major portion of funding that benefits the three county area:
* Tampa water resource recovery project $41 million
* Pasco Rainbow (reuse/wellfield augmentation) $25 million
* Tampa NW Hillsborough interconnect $1.7 million
* Tampa NW aquifer storage & recovery $350 thousand
* Section 21 wellfield rehydration pilot $420 thousand
* Central and NW Hillsborough County reuse $9 million
The 1996 Legislative mandate for this study (amendment to Section 373.1963 Assistance to
West Coast Regional Water Supply Authority), included an evaluation of:
Utilization of .1 mills of Basin Board ad valorem taxing authority were the Legislature
or water management district to make such funding available to the Authority
Though not passed, a proposed amendment to Section 373.1963, Senate bill 2552, would have
allowed the Southwest Florida Water Management District to provide assistance, in lieu of the
provisions in s. 373.1962(2)(a), to the Authority upon request by levying an ad valorem tax of
not more than 0.10 mill on all taxable property within the limits of the Authority. This Senate
bill requires that the assistance must be used solely to finance capital projects that the Authority
considers will remediate the adverse effects of existing facilities and are limited to
conservation, inter-connections, and alternative water source projects.
As shown earlier in Exhibit 4-2 of Basin Board funding, all of the Basin Boards in the region,
with the exception of Pinellas-Anclote River, have sufficient authority to include the 0.1 mill ad
valorem tax and still easily be within their 0.500 mill limit. Pinellas-Anclote River (at the .401
mill level for 1997) would just meet the taxing limit with the 0.1 mill addition and could
continue funding projects at current levels.
Exhibit 4-3 shows that $6.4 million per year would be generated given this .1 mill tax. Since
SWFWMD is making significant funding levels available for alternative supply development,
the flexibility of using this funding to help establish an expanded regional authority would be
most beneficial. In this regard, the funding could be used to help pay for acquisition costs of
member facilities. If the funding was made available for an extended period, a long-term bond
issue could provide significant capital that may be needed for acquisition costs. For example, a
20 year bond issue secured by this funding could generate $60 million or more.
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Basin Board Millage of 0.1
(S1S1000 assessed value)
Save Our Rivers / Preservation 2000 Funds
SWFWMD manages the Save Our Rivers/Preservation 2000 Programs. Section 373.59,
Florida Statutes, outlines the criteria used in selecting land acquisition projects which allow the
proper functioning of existing and proposed water management projects, as well as to protect
water quality and recharge the natural water systems. In June 1990, the Legislature enacted the
Florida Preservation 2000 Act (Section 259.101, Florida Statutes) which broadens the scope
and criteria of SWFWMD's Land Trust Fund and provides an additional funding source. For
Fiscal Year 1995, SWFWMD received $10 million for Save Our Rivers Program and $20
million for Preservation 2000 Program.
These land acquisition funds could potentially be made available for land purchases related
acquisition of existing water supplies or related to proposed Master Water Plan projects. For
example, the Authority could purchase wellfield land, paying market value of the land
potentially in lieu of the water supply facilities.
The Authority is authorized to issue revenue bonds to finance its capital improvements and
such bonds may be secured by the general obligation of any county or municipal customer.
Revenue bonds are limited obligations of Authority that are payable exclusively from
designated revenue streams. The Authority has long-term bonds outstanding in the amount of
$116 million (end of FY 1995) payable by member governments under various inter-local
Under its inter-local agreements, the Authority has issued bonds secured by its individual
members in proportion to water entitlements provided in the contracts. This bond security
structure under the Regional System Contract has led to the single vote veto issue discussed
earlier. One key alternative for Authority debt financing is the issuance of revenue bonds
secured by system-wide rates, which could eliminate this single vote veto issue. To pursue
system-wide debt financing, the Authority would have to take steps such as:
* acquire or obtain control over more of the member facilities
* implement system-wide or average pricing for a major portion of the wholesale services
* substitute individual entitlements with overall system entitlements
County Tax Base FY'97 Max. Total Funding FY
Hillsborough County $ 25,828,404,271 0.100 $ 2,582,840
Pinellas County $ 30,925,172,321 0.100 $ 3,092,517
Pasco County $ 7,275,301,161 0.100 $ 727,530
Total $ 64,028,877,753_ $ 6,402,888
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To ensure that water revenue bonds will be attractive to investors, the factors listed below
should be considered:
* The financial condition of the Authority, including its revenues and expenses, its service
area, and its management.
* A legal commitment by the Authority and its members to impose sufficient charges to pay
for of all system expenses including the debt service on the revenue bonds.
* The willingness and ability of member governments to pass on wholesale costs to its retail
SWFWMD has solicited and obtained commitment of approximately $20 million dollars in US
Environmental Protection Agency (USEPA) funding for the Hillsborough Bay Resource
Exchange project. This amount in conjunction with $40 million of SWFWMD funding
provides for $60 million of currently committed funding for this $108 million project.
State Revolving Fund (SRF) loan
Under the SRF concept, the SRF loan is subsidized and secured through a Federal capitalization
grant and the grant revolves or becomes available for future capital needs as the loan is repaid.
The SRF loan funds have traditionally been available only for wastewater related projects. In
the summer of 1996, the amendments to the Safe Drinking Water Bill passed, providing
approximately $1 billion dollars in Federal capitalization grant for water supply related
projects. Future availability of funding of these funds for the Authority is uncertain under
Florida's SRF program but could be an options for future supply projects.
Management and Operations
Management and operations of water supply facilities are influenced by the ownership and/or
entitlements specified in inter-local agreements. Changes in operational responsibility would
likely require renegotiation of the agreements. Options for the Authority include:
* Member jurisdictions control operations (i.e., pumping) of its wellfields and facilities
owned (even if operated by the Authority)
Authority controls pumping and operations of all facilities
Authority controls member facilities under negotiated conditions (e.g., enabling rotational
supplies to balance out capacity needs)
The entitlements and costs under existing contractual arrangements have created incentives for
greater utilization of less expensive water supplies controlled by individual members. In our
interviews, many parties expressed the need for a more regional management of the water
supplies, particularly to encourage staggered pumping of selected wellfields and to assure cross
utilization for system stability and efficiency.
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Options for Acquisition of Member Facilities
To implement a fully regional approach to water supply, member's wholesale water supply
assets would be transferred to the Authority. Acquired assets could include water supply
facilities (and entitlements) or both land and facilities. The Authority is forbidden by statute
(section 373.1962) to provide retail water services. The cost related to acquisition of member
facilities can influence the eventual costs paid by the Authority and its customers. If such
acquisition costs are financed by the Authority with bonded indebtedness and repaid with
system-wide rates, all members will share in paying these costs. The primary methods for
valuing assets for acquisition are described below.
* Outstanding debt. All facilities are donated to the Authority with the assumption of
outstanding debt. Many older facilities are paid off and have little or no outstanding debt.
* Original cost. The Authority pays for the remaining lives of facility assets based on the
original cost of the assets. A related method would pay the net book value (original cost
minus accumulated depreciation) based on the members' accounting records. The former
method would assign values to any asset with remaining life even if fully depreciated on the
* Replacement cost. The Authority pays for the remaining lives of facility assets based on
the value of replacing the assets using current costs and technology. This method typically
assigns the highest value of the cost methods and brings into play uncertainties over the
condition of the assets and remaining capacities and lives.
* Marginal cost. The present value of the incremental costs associated with establishing a
uniform capital cost rate is paid to those impacted members. This would compensate those
members for the additional capital costs associated with moving to system-wide rates. This
method would substitute for a capitalized income approach which is common for
acquisition of private utilities and businesses.
* Purchase of land The Authority could purchase wellfield land, paying market value of the
land potentially in lieu of the water supply facilities. The potential for special funding
through SWFWMD's land acquisition program could make this option attractive (see
previous section on Financing Options). Section 373.1962(2)(e) refers to the Authority's
rights of condemnation which cannot be used to obtain water rights or
The debt and original cost methods are low cost approaches since many of the facilities are
older with little debt or remaining book value. Replacement and marginal cost methods would
present higher acquisition values to be financed and recovered from customer rates.
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State regulatory commissions typically do not allow acquisitions at greater values than net plant
investment (original cost based) unless substantial benefits to customers are demonstrated to
justify higher values. Paying a premium over net investment may result in duplicate costs to
customers who originally paid for the facilities. The acquisition amounts paid to member
governments could be used to reduce the impacts of a higher system-wide rate that could be
applied under Authority ownership options. This would provide greater equity to existing
customers and reduce duplicate costing.
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