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16. Accept results of draft Wastewater Capacity Fee Review Study by Black and Veatch
Page 1 of 23 Item 16. CENTRAL SAN BOARD OF DIRECTORS ' POSITION PAPER MEETING DATE: MAY 3, 2018 SUBJECT: ACCEPT RESULTS OF DRAFT WASTEWATER CAPACITY FEE REVIEW STUDY BY BLACK AND VEATCH SUBMITTED BY: INITIATING DEPARTMENT: DANEA GEMMELL, PLANNING AND ENGINEERING AND TECHNICAL SERVICES- DEVELOPMENT SERVICES DIVISION PDS-RATES AND FEES MANAGER REVIEWED BY: JEAN-MARC PETIT, DIRECTOR OF ENGINEERING AND TECHNICAL SERVICES ANN SASAKI, DEPUTY GENERAL MANAGER 9 , .,�- I Roger S. Bailey General Manager ISSUE Staff respectfully submits this draft of the Wastewater Capacity Fee Review Study by Black and Veatch for input and comment. BACKGROUND Capacity Fees are used to equalize the investment in Central San's assets among current and new users to ensure that new users pay their fair share for infrastructure capacity and services. Both state and federal courts have recognized the imposition of capacity fees as a legitimate form of land use regulation, provided the fees meet standards intended to protect against regulatory takings. Black and Veatch has reviewed Central San's capacity fee calculations and methodology to confirm that these standards are met and confirm the capacity fee. After reviewing the 2017 Capacity Fee Model, Black and Veatch made the following observations: May 3, 2018 Regular Board Meeting Agenda Packet- Page 131 of 225 Page 2 of 23 • The equity buy-in methodology used in the capacity fee calculation is appropriate for Central San's wastewater system. • The use of replacement cost less depreciation to determine asset values is appropriate. • The exclusion of contributed assets from the calculation is appropriate to avoid double recovery of costs. • The practice of different service zones is appropriate given that Central San tracks pump station and related assets separately. • The 2017 Capacity Fee Model contained several small calculation errors. These included: • The misuse of inflation/depreciation factors for trunk sewers and interceptors. This was a result of a wrong cell reference. • The identification of negative asset values. These were a result of disposal of assets, re- evaluation of assets, or other similar activities. Both issues were brought to the attention of Central San staff and have been corrected and addressed accordingly. ALTERNATIVES/CONSIDERATIONS None. FINANCIAL IMPACTS None. COMMITTEE RECOMMENDATION The Finance Committee reviewed this item at its April 24, 2018 meeting and recommended acceptance of the report. RECOMMENDED BOARD ACTION Receive the Capacity Fee Review Study and provide comments to staff. Strategic Plan Tie-In GOAL THREE: Be a Fiscally Sound and Effective Water Sector Utility Strategy 1 - Conduct Long-Range Financial Planning ATTACHMENTS: 1. Draft Wastewater Capacity Fee Review Study May 3, 2018 Regular Board Meeting Agenda Packet- Page 132 of 225 Page 3 of 23 DRAFT WASTEWATER CAPACITY FEE REVIEW STUDY B&V PROJECT NO. 195246.0100 PREPARED FOR Central Contra Costa Sanitary District MARCH 2, 2018 Wj� , BLACK &VEATCH ©Black&Veatch Holding Company 2011.All rights reserved. Building a world of difference.- May 3, 2018 Regular Board Meeting Agenda Packet- Page 133 of 225 Page 4 of 23 May 3, 2018 Regular Board Meeting Agenda Packet- Page 134 of 225 Page 5 of 23 Central Contra Costa Sanitary District I WASTEWATER CAPACITY FEE REVIEW STUDY Table of Contents 1 Introduction................................................................................................................................................. 1 1.1 Purpose.............................................................................................................................................................................1 1.2 Disclaimer........................................................................................................................................................................1 2 Capacity Fee Background.........................................................................................................................2 2.1 Legal Requirements in California...........................................................................................................................2 2.1.1 Assembly Bill 1600.....................................................................................................................................3 2.1.2 San Marcos Legislation.............................................................................................................................5 3 Capacity Fee Methodologies...................................................................................................................6 3.1.1 Credits..............................................................................................................................................................6 3.2 Equity Buy-In Methodology.....................................................................................................................................7 3.2.1 Assets and Valuation Approaches........................................................................................................7 4 Capacity Fee Analysis................................................................................................................................9 4.1 Fixed Assets Valuation................................................................................................................................................9 4.2 Residential Unit Equivalents.................................................................................................................................10 4.3 Existing Capacity Fee...............................................................................................................................................11 4.3.1 General Observations.............................................................................................................................12 5 Basis for Capacity Fee..............................................................................................................................13 5.1 Industry Units of Measure......................................................................................................................................13 5.2 Customer Classes.......................................................................................................................................................13 5.2.1 Restaurants................................................................................................................................................14 5.2.2 Delicatessens.............................................................................................................................................15 5.3 Units of Measure........................................................................................................................................................16 BLACK&VEATCH CORPORATION I Table of Contents F,& May 3, 2018 Regular Board Meeting Agenda Packet- Page 135 of 225 Page 6 of 23 May 3, 2018 Regular Board Meeting Agenda Packet- Page 136 of 225 Page 7 of 23 Central Contra Costa Sanitary District I WASTEWATER CAPACITY FEE REVIEW STUDY 1 Introduction 1.1 PURPOSE This report was prepared for Central Contra Costa Sanitary District (District) to document and present the findings of a wastewater capacity fee review for the District. The report establishes the current methodology used by the District for the existing capacity fees. The specific goals of the study were to review the: Capacity Fee Background; Capacity Fee Methodologies; Capacity Fee Analysis; and Basis for Capacity Fee. 1.2 DISCLAIMER In conducting our study, we reviewed the documents provided by the District and other documents we deemed necessary to express our opinion of the District's wastewater capacity fee. While we consider such documents to be reliable, Black&Veatch has verified the accuracy of these documents to extent possible.The documents we reviewed were: Capacity Fee Update Calcs 2017-08-08 for BV.xlsx (2017 Strength Model) Ordinance 296,including Exhibit A 2017 Capacity Fee Report dated April 11, 2017 (2017 Capacity Fee Report) 2017-18 Capacity Fees Calc 2017-04-11.xlsx (2017 Capacity Fee Model) Wastewater Cost of Service Study dated May 21, 2015 Master Plan Summary.pdf and various District web pages BLACK&VEATCH CORPORATION I Introduction May 3, 2018 Regular Board Meeting Agenda Packet- Page 137 of 225 Page 8 of 23 WasteWater Capacity Fee Review Study I Central Contra Costa Sanitary District 2 Capacity Fee Background Many wastewater utilities assess capacity fees to help offset costs for increased system capacity. Generally levied at the time building permits are required, the capacity fees are assessed for increased wastewater flow capacities which result from either (1) changes in use of a structure served by an existing connection to the system, or (2) a new connection to the system. For the purposes of this report, both sources of additional wastewater flow are included in the term "new" customer. Capacity fees are based on the premise that new customers or developers should pay for required wastewater system capacity, to the extent that wastewater service charges do not support the investment for the required capacity. Similar charges are often termed by other utilities as capital recovery fees, system development charges, impact fees, system equity charges, or other names. For the purposes of this report,the term capacity fees will be used. These charges represent the current demand requirement of each property and are not transferable to any other property located within the service area. The cost of providing such capacity in wastewater system facilities for new customers can contribute significantly to the need for capital financing and service rates and/or taxes to support the financing. Collection of capacity fees to partially or wholly finance new customer capacity requirements can, over time, help reduce the amount of financing and the magnitude of rate increases that otherwise might be needed. Ideally, capacity fees should generate sufficient revenues to meet future expansion requirements so that existing users are not burdened by the proportionate costs of expansion caused by growth in system use by new users. 2.1 LEGAL REQUIREMENTS IN CALIFORNIA Both state and federal courts have recognized the imposition of capacity fees as a legitimate form of land use regulation, provided the fees meet standards intended to protect against regulatory takings. Land use regulations, development exactions and impact fees are subject to the Fifth Amendment prohibition on taking of private property for public use without just compensation. To comply with this requirement, development regulations must be shown to substantially advance a legitimate governmental interest. In the case of capacity fees,that interest is in the protection of public health, safety, and welfare by ensuring that development is not detrimental to the quality of essential public services. There is little federal case law specifically dealing with capacity fees, although other rulings on other types of exactions are relevant. In one of the more important exaction cases, the U.S. Supreme Court found that a government agency imposing exactions on development must demonstrate an "essential nexus" between the exaction and the interest being protected (Nollan v. California Coastal Commission, 1987). In a later case (Dolan v. City of Tigard, OR, 1994), the Court ruled that an exaction also must be "roughly proportional" to the burden created by development. However,the Dolan decision appeared to set a higher standard of review for mandatory dedications of land than for monetary exactions such as capacity fees. There are three reasonable relationship requirements for impact fees that are closely related to "rational nexus" or "reasonable relationship" requirements enunciated by a number of state courts throughout the U.S.Although the term "dual rational nexus" is often used to characterize the standard by which courts evaluate the validity of capacity fees under the U.S. Constitution, a more �j B&V PROJECT NO.195246.0100 1 APRIL 12,2018 May 3, 2018 Regular Board Meeting Agenda Packet- Page 138 of 225 Page 9 of 23 Central Contra Costa Sanitary District I WASTEWATER CAPACITY FEE REVIEW STUDY rigorous standard recognizes three elements: need, benefit, and proportionality. The dual rational nexus test explicitly addresses only the first two, although proportionality is reasonably implied, and was specifically mentioned by the U.S. Supreme Court in the Dolan case. The reasonable relationship language is considered less strict than the rational nexus standard used by many courts. Individual elements of the nexus standard are discussed further in the following paragraphs. All new development in a community creates additional demand on some, or all, public facilities provided by local government. If the capacity of facilities is not increased to satisfy that additional demand,the quality or availability of public services for the entire community will likely deteriorate. Capacity fees may be used to recover the cost of development-related facilities,but only to the extent that the need for facilities is a consequence of development that is subject to the fees. The Nollan decision reinforced the principle that development exactions may be used only to mitigate conditions created by the development upon which they are imposed. That principle clearly applies to capacity fees. The requirement that exactions be proportional to the impacts of development was clearly stated by the U.S. Supreme Court in the Dolan case and is logically necessary to establish a proper nexus. Proportionality is established through the procedures used to identify development-related facility costs, and in the methods used to calculate capacity fees for various types of facilities and categories of development. The demand for facilities is measured in terms of relevant and measurable attributes of development,such as equivalent dwelling units. A sufficient benefit relationship requires that capacity fee revenues be segregated from other funds and expended only on the facilities for which the fees were charged. Capacity fees must be expended in a timely manner and the facilities funded by the fee revenues must serve the development or new connections paying the fees. However, nothing in the U.S. Constitution (or in the case of this study nothing in the California statutes) requires that facilities funded with fee revenues be available exclusively to development paying the fees. In other words, benefit may extend to a general area including multiple real estate developments. Procedures for the earmarking and expenditure of fee revenues are mandated in state enabling legislation. All of these procedural and substantive issues are intended to ensure that new development benefits from the capacity fees they are required to pay. 2.1.1 Assembly Bill 1600 To guide the widespread imposition of such charges, the State of California Legislature adopted the Mitigation Fee Act(Act) with Assembly Bill 1600 in 1987 and subsequent amendments. The Act, contained in California Government Code (beginning with Section 66000), establishes requirements on local agencies for the imposition and administration of fee and charge programs. The Act requires local agencies to document five findings when adopting a fee. In 1997, the legislature provided for specific statutory authority for public agencies to impose and collect certain charges (designated as "capacity fees") to allow for financing and capital cost recovery for facilities (new or existing) to meet the demands imposed on such system from new users (see California Government Code Section 66013). The five findings in the Act required for adoption of the maximum justified fees documented in this report are: 1) Purpose of Fee, 2) Use of Fee Revenues, 3) Benefit Relationship, 4) Burden Relationship, and 5) Proportionality. They are each discussed below and are supported throughout the rest of this report. BLACK&VEATCH CORPORATION I Capacity Fee Background May 3, 2018 Regular Board Meeting Agenda Packet- Page 139 of 225 Page 10 of 23 WasteWater Capacity Fee Review Study I Central Contra Costa Sanitary District 2.1.1.1 Purpose of Fee Identify the purpose of the fee (§66001(a)(1) of the Act). Many agencies follow a policy that new users or new development will not burden existing ratepayers with the cost of public facilities required to accommodate growth. The District's existing capacity fee is imposed to provide a funding source from new users for infrastructure that is available to meet their demands on the system. The exaction of the capacity fee advances a legitimate interest by enabling the District to meet the wastewater system needs of new users. 2.1.1.2 Use of Fee Revenues Identify the use to which the fees will be put. If the use is financing facilities,the facilities shall be identified. That identification may, but need not, be made by reference to a capital improvement plan as specified in §65403 or §66002, may be made in applicable general or specific plan requirements, or may be made in other public documents that identify the facilities for which the fees are charged (§660O1(a)(2) of the Act). The District's existing capacity fee is used to "buy-in" to the current wastewater system so long as sufficient capacity is available. Collected revenues will be used to reimburse the District for capital investments made that resulted in capacity for future demand, for new facilities,to upgrade existing facilities, or for other capital infrastructure costs to keep the system operating at acceptable levels. The cost of the existing wastewater facilities was determined by the District's fixed asset records for the wastewater system. 2.1.1.3 Benefit Relationship Determine the reasonable relationship between the use of capacity fees and the type of development project on which the fees are imposed (§66O01(a)(3) of the Act. The District's existing facilities and system provide a network of service accessible to the buildings and facilities resulting from new users or new development. Capacity fee revenues will be used to upgrade the existing system which will benefit all new users as well as to pay a portion of the debt service on outstanding bonds which were issued in part to construct capacity-related wastewater facilities. Thus, there is a reasonable relationship between the use of fee revenues and the types of new users or new development that will pay the charge. 2.1.1.4 Burden Relationship Determine the reasonable relationship between the need for the public facilities and the types of development on which the fees are imposed (§66001(a)(4) of the Act). The need for the facilities is based on the cumulative demands for service imposed on the system based on the number of new accounts within the proposed development. These demands are represented by service units for each customer type to be served by the system. Service units are based on equivalent dwelling units. Thus, there is a reasonable relationship based on sound engineering principles for the charges imposed. 2.1.1.5 Proportionality Determine how there is a reasonable relationship between the fees amount and the cost of the facilities or portion of the facilities attributable to the development on which the fee is imposed (§66001(b) of the Act). �j B&V PROJECT NO.195246.0100 1 APRIL 12,2018 May 3, 2018 Regular Board Meeting Agenda Packet- Page 140 of 225 Page 11 of 23 Central Contra Costa Sanitary District I WASTEWATER CAPACITY FEE REVIEW STUDY This reasonable relationship between the capacity fee for a specific development project and the cost of the facilities attributable to the demand resulting from that development project will reflect the estimated wastewater system capacity demand of that project. The total charge for a specific project is based on the project's projected use of existing system capacity. The schedule of charges converts the estimated capacity that a development project will use in the wastewater system into a charge based on equivalent dwelling units and square footage required by that project. Projects that are projected to demand more capacity will correspondingly pay a higher charge, as they have the ability to discharge more to the wastewater system. Thus, the schedule of fees ensures a reasonable relationship between the capacity fee for a specific development project and the cost of the facilities associated with wastewater demand resulting from that development project. 2.1.2 San Marcos Legislation In 1988, the California Legislature enacted Government Code Sections 54999-54999.6 authorizing public agencies providing public utility service to charge or increase an existing capital facilities fee or to impose a new one on public entities who use the utility service facilities. This legislation contains several provisions for the imposition of capital facilities fees as follows: Section 54999.3(a) states that fees charged to any public educational institution are limited to actual construction costs of the portion of a public utility facility that actually services a public agency. Section 54999.3(b) states that any new or increased capital facilities fee in excess of the amount permitted in Section 54999.3(a) can only occur by agreement between the agency charging the fee and the agency for which the fee is imposed. Section 54999.3(c) states that the public agency imposing the new or increased fee has the burden to produce evidence to establish the fee and demonstrate that the fee is nondiscriminatory and that the amount of the fee does not exceed the amount necessary to provide capital facilities for which the fee is charged. BLACK&VEATCH CORPORATION I Capacity Fee Background F,& May 3, 2018 Regular Board Meeting Agenda Packet- Page 141 of 225 Page 12 of 23 WasteWater Capacity Fee Review Study I Central Contra Costa Sanitary District 3 Capacity Fee Methodologies Capacity fees are traditionally assessed to new development to recover the value of system capacity constructed for new customer service. There is no single established method for the determination of capacity fees that is both appropriate for all situations and perfectly equitable to all new customers. There are, however, various approaches which are currently recognized and utilized, some to a greater extent than others, by wastewater utilities. These methods can be categorized as follows: 1. System Buy-In. Capacity fees are designed to derive from the new customer an amount per connection equal to the "equity" in the system attributable to similar existing customers. New development would pay for its share of the useful life and remaining capacity of existing facilities from which new development would benefit. (Note: The word "equity" refers to that portion of system value for which there is no offsetting debt. It does not imply ownership of, or title to,utility facilities.) 2. Incremental Cost-Pricing. Capacity fees are designed to derive from the new customer the marginal, or incremental cost of system expansion associated with new customer growth. This method is based on the premise that new connections to the wastewater system should be responsible for those costs which they cause to be incurred for the most recent or next increment of required system capacity, except as such costs are recovered from user fees or other utility charges. 3. Planned Facility or Growth Approach. Capacity fees are based on a long-term CIP or master planning document that identifies facilities needed to provide additional capacity to the system required to support new connections. In effect, the level of service standard of the existing system may or may not be adequate to support new connections. The additional capacity may or may not benefit existing customers. If existing customers would benefit in part by the addition of new facilities, the cost of this portion benefitting existing customers must be borne through revenues other than capacity fees. Regardless of methodology employed, revenues derived from capacity fees are commonly used to offset part or all capital costs to accomplish any of the following objectives: To pay the capital costs of future capacity provided for growth. To provide rate relief to existing system users by recovering that portion of the annual existing and future capacity capital costs associated with growth, including debt service requirements and direct asset purchases from current revenues. To accumulate reserves to finance system improvements and expansions required to meet growth needs. Based on discussions with District staff and a review of the Wastewater Master Plan, the District's wastewater system assets contain sufficient excess capacity that will be able to serve all anticipated new connections within the next 20 years. Based on this, the existing capacity fee uses the buy-in methodology. 3.1.1 Credits Regardless of the methodology, a consideration of credits is integral to the implementation of a defensible capacity fee methodology. There are two types of credits with specific characteristics. �j B&V PROJECT NO.195246.0100 1 APRIL 12,2018 May 3, 2018 Regular Board Meeting Agenda Packet- Page 142 of 225 Page 13 of 23 Central Contra Costa Sanitary District I WASTEWATER CAPACITY FEE REVIEW STUDY The first is a revenue credit due to possible double payment situations, which could occur when other revenues may contribute to the capital costs of infrastructure covered by the capacity fee.The second type of credit is a site-specific credit or developer reimbursement for dedication of land or construction of system improvements; these contributed assets and related credits are a matter of agency policy and typically not included in a schedule of capacity fees. 3.2 EQUITY BUY-IN METHODOLOGY The existing wastewater capacity fee is based on the system buy-in approach, specifically the equity buy-in approach. The equity buy-in approach utilizes used capacity instead of system capacity. Per discussions with the District, the current wastewater system assets were initially oversized, in part, to accommodate future growth. To facilitate the construction of these oversized facilities, the District financed capital construction through a variety of financing sources such as debt instruments, customer rates, other revenues, prior capacity fees and reserves. Debt service on the debt instruments are paid primarily through property tax revenue. Existing customers have borne this initial cost of existing facilities, including the excess capacity available in the system which can in turn serve future connections. As such, new connections are obligated to bear their fair share of the prior carrying cost by paying a fee commensurate with this investment.This principle is at the heart of the buy-in fee approach. 3.2.1 Assets and Valuation Approaches The question then becomes how a wastewater utility should value the existing assets, and thus the excess capacity available to new connections. The first step is to identify a proper basis for determining existing wastewater asset value. There exist various methods to estimate the value of utility facilities required to furnish service to new users.The two principal methods commonly used to value a utility's properties are original cost and replacement cost,with or without considerations for depreciation of existing assets. The following sections give an overview of each valuation approach. 3.2.1.1 Original Cost The original cost approach relies on holding the recorded costs of tangible property constant. The principal advantages of the original cost method lie in its relative simplicity and stability. The major criticism levied against original cost valuation pertains to the disregard of changes in the value of money over time,which are attributable to inflation and other factors. As evidenced by history, prices have tended to increase rather than to remain constant. Because the value of money varies inversely with changes in price, monetary values in most recent years have exhibited a definite decline; a fact not recognized by the original cost approach. This situation causes further problems when it is realized that most utility systems are developed over time on a piecemeal basis as demanded by service area growth. Consequently, each property addition was paid for with dollars of different purchasing power. When these outlays are added together to obtain a plant value the result can be seriously misleading. 3.2.1.2 Replacement Cost The replacement cost approach incorporates changes in the value of the dollar over time, at least as considered by the impact of inflation. The replacement cost represents the cost of duplicating the existing utility facilities at current prices. Unlike the original cost approach, the BLACK&VEATCH CORPORATION I Capacity Fee Methodologies May 3, 2018 Regular Board Meeting Agenda Packet- Page 143 of 225 Page 14 of 23 WasteWater Capacity Fee Review Study I Central Contra Costa Sanitary District replacement cost method recognizes price level changes that may have occurred since plant construction. The most accurate replacement cost valuation would involve a physical inventory and appraisal of plant components in terms of their replacement costs at the time of valuation. However, with original cost records available, a reasonable approximation of replacement cost plant value can most easily be ascertained by trending historical original costs. This approach employs the use of applicable cost indices to express actual capital costs experienced by the utility in terms of current dollars. An obvious advantage of the replacement cost approach is that it gives consideration to changes in the value of money over time. 3.2.1.3 Depreciation Considerations of the current value of utility facilities may also be materially affected by the effects of age and depreciation. Depreciation takes into account the anticipated losses in plant value caused by wear and tear, decay, inadequacy, and obsolescence. To provide appropriate recognition of the effects of depreciation on existing utility facilities,both the original cost and replacement cost valuation measures can also be expressed on an original cost less depreciation (OCLD) and a replacement cost less depreciation (RCLD) basis. These measures are identical to the aforementioned valuation methods, with the exception that accumulated depreciation is computed for each asset account based upon its age or condition, and deducted from the respective total original cost or replacement cost to determine the OCLD or RCLD measures of plant value. Recognition of depreciation in establishing value for purposes of system development charge under the system buy-in approach is appropriate in consideration of the fact that, once the new connector has "bought into" the system, he assumes the same status as similar existing customers. This includes assumption of the same responsibilities for future replacement of worn out or obsolete facilities. �j B&V PROJECT NO.195246.0100 1 APRIL 12,2018 May 3, 2018 Regular Board Meeting Agenda Packet- Page 144 of 225 Page 15 of 23 Central Contra Costa Sanitary District I WASTEWATER CAPACITY FEE REVIEW STUDY 4 Capacity Fee Analysis 4.1 FIXED ASSETS VALUATION For this review, the District provided the 2017 Capacity Fee Report and 2017 Capacity Fee Model as their evidence of how the existing capacity fee is derived. Based on the document, the District employs the RCLD method to value its existing system assets. There are several reasons to choose this approach. First, the wastewater system assets are well-depreciated. Many of the assets have reached at least 50 percent of their useful life. This means that the District will need to renovate or replace many of these assets over the next 10 to 20 years, therefore replacement value is appropriate. Secondly, it is reasonable to assume that the RCLD approach provides the utility with a return on its money used to build the past facilities for future customers. This return is often accounted for by the increase in the replacement cost value of the facilities. In Table 1, the determination of the RCLD asset values for the different asset categories utilized in the capacity fee analysis are summarized. Table 1.Wastewater Asset Categories CATEGORYASSET • Land Land investment is based on the reported initial 1993 estimated value equal to $23,872,000 and has been adjusted by the annual interest rates together with a few annual land additions and one apparent land sale to derive an estimated 2016 land value of$49,910,832.The inflation has been estimated by applying the average annual interest rates earned on District Sewer Construction funds rather than actual valuation, relevant price increases in local land parcels or use of area trend factors. Treatment Plant Treatment plant investment is based on reported annual additions from 1947 through 2016. These annual values are inflated to 2016 values by applying Engineering News Record's published Construction Cost Indexes (CCI) for the San Francisco region (CCI-SF). Each annual inflated amount is then depreciated assuming the additions are 45% related to tanks and foundations with a 100 year service life, 20% related to buildings with a 75 year service life, and the remaining 35% related to equipment with a 30 year service life. The sum of the adjusted annual values through 2016 is equal to$341,776,207. Recycled Water Recycled water facilities investment is based on reported annual additions from 1992 Facilities through 1996 inflated by the CCI-SF and depreciated assuming 75% of the total value is related to pipelines with a 50 year average service life and the remaining 25% of total value is related to equipment with an expected 30 year service life. Total recycled water facilities investment is indicated to be$18,137,165. Trunk and Trunks and Interceptors investment is based on reported annual additions from 1947 Interceptors through 2016 inflated by the CCI-SF and depreciated assuming 30% of the total value is related to interceptors with a 150 year service life and the remaining 70% is related to trunk sewers with an expected 100 year service life. Investment related to interceptors and sewers is$323,797,037.This investment is reported to exclude the Dougherty tunnel and trunk sewer, both of which were contributed assets. BLACK&VEATCH CORPORATION I Capacity Fee Analysis F May 3, 2018 Regular Board Meeting Agenda Packet- Page 145 of 225 Page 16 of 23 WasteWater Capacity Fee Review Study I Central Contra Costa Sanitary District District Renovated District Renovated Mains primarily recognizes annual main improvements from 1988 Mains through 2016. These annual amounts are inflated by the CCI-SF and depreciated assuming a 100-year service life. Investment related to these mains is$199,527,438. Pumping Stations Pumping Station investment is based on a summary of annual additions from 1949 through 2016 inflated by the CCI-SF and depreciated assuming 45% of total costs are related to tanks and foundations with a 100 year service life, 20%related to buildings with a 75 year service life, and the remaining 35% related to equipment with a 30 year service life. Investment in pumping station investment is$80,653,264. General General Improvements investment is based on a summary of annual additions from 1967 Improvements through 2016. These additions are inflated by the CCI-SF and depreciated assuming 50% of this investment is related to buildings with a 50-year service life, 35%of the investment is related to equipment and furniture with an average 25-year service life and the remaining 15% of this investment is related to vehicles with a 10-year service life. Total investment for these facilities is$65,456,892. Major Repairs The District includes an investment category identified as Major Repairs in its total plant value used to calculate capacity fees. This investment is based on the past 10-years of annual budgeted expenditures (2007 — 2016) inflated by the CCI-SF and depreciated 10 percent per year.The resulting amount is then reduced 50 percent. It is reported to have a value of$10,904,325. Fund Balances In addition to plant value in service, the District includes available fund balances that will be used for replacement of future assets. This includes $28,991,817 from the Sewer Construction Fund (net of outstanding debt), $33,514,465 from the Running Expense Fund and Debt Service Fund and $5,338,938 from the Emergency and Self Insurance Fund. Combining all the different asset categories, the total plant in service of$1,090,163,160 plus available fund balances of $67,845,220 provides a total asset value of $1,158,008,380. This represents total investment applicable to new users served by pumping plants. Deducting the pumping plant investment of $80,653,264 yields a gravity flow investment of $1,077,355,116. In reviewing the different asset categories, it is recommended that the District conduct a detailed review of the assets within the Major Repair category to confirm that the assets are still appropriate to include in the capacity fee calculation. It is important to note that while the District tracks the value of contributed assets, the total value of $658,442,000 are excluded from the total asset value and capacity fee calculations. Contributed assets are assets that have been contributed by local developers for the purpose of new development. Therefore the contributed assets are removed from the capacity fee calculation in order to avoid double recovery of costs. 4.2 RESIDENTIAL UNIT EQUIVALENTS The second step is to identify a proper basis for determining existing wastewater dwelling units. The District uses a Residential Unit Equivalent (RUE) as the basis for determining capacity fees. RUE is defined as a single family residence using 200 gallons per day (gpd) with strength of B&V PROJECT NO.195246.0100 1 APRIL 12,2018 May 3, 2018 Regular Board Meeting Agenda Packet- Page 146 of 225 Page 17 of 23 Central Contra Costa Sanitary District I WASTEWATER CAPACITY FEE REVIEW STUDY 200 mg/L for Biochemical Oxygen Demand (BOD) and 215 mg/L for Total Suspended Solids (TSS). Since non-residential customers are composed of multiple RUEs, the District determines the total RUE's by dividing the total Sewer Service Charge (SSC) revenue by the existing SSC unit charge. In Table 2, the determination of the RUEs for the different service zones utilized in the capacity fee analysis are summarized.The existing wastewater system is primarily a gravity system which relies on the earth's gravity to help move sewage flow through the 1,500 miles of collection system mains to the centralized treatment facility. The remainder of the wastewater system is a pumped feed system which relies on 19 pump stations to convey sewage flow from low lying areas to gravity system areas through force mains. Table 2.Wastewater RUE Categories DESCRIPTION Gravity Service The total RUEs were determined based on the 2016 SSC operating revenues of $72,233,903 (O&M component) together with SSC non-operating revenues of$8,319,860 (capital component) obtained from CAFR financials for a total 2016 SSC revenue of $80,533,763.This revenue amount was then divided by the residential wastewater charge for single family dwellings of $471.00/RUE (effective July 1, 2015) to get total RUEs of 171,027. The gravity service represents the service area where all sewage generated can flow by gravity towards the centralized treatment facility. Pumped Service Within the gravity RUEs,there are RUEs that are located within the pumped zones of the service area. Pumped service represent portions of the service area that require pumping stations to transport the sewage flow to gravity service. In 2000, the District identified 37,562 RUEs located within these pumped zones. Annual additions from 2000 through 2016 were incorporated to arrive at 49,196 RUEs. 4.3 EXISTING CAPACITY FEE The final step is to determine the existing wastewater capacity fee. The District divides the RCLD total asset value by the RUEs to arrive at the capacity fee. In Table 3,the determination of the capacity fees is summarized. Table 3.Wastewater Capacity Fee CATEGORYASSET Land $49,910,832 $292 Treatment Plant $341,776,207 $1,998 Recycled Water Facilities $18,137,165 $106 Trunks and Interceptors $323,797,037 $1,893 District Renovated Mains $199,527,438 $1,167 General Improvements(Buildings, $65,456,892 $383 Equipment,etc.) BLACK&VEATCH CORPORATION I Capacity Fee Analysis �j m May 3, 2018 Regular Board Meeting Agenda Packet- Page 147 of 225 Page 18 of 23 WasteWater Capacity Fee Review Study I Central Contra Costa Sanitary District Major Repairs $10,904,325 $64 Sewer Construction Fund Balance $28,991,817 $170 Running Expense Fund& Debt $33,514,465 $196 Service Fund Balances Self-Insurance Fund Balance $5,338,938 $31 Capacity Fee—Gravity Service $6,300 Pumping Stations $80,653,264 $1,639 Capacity Fee—Pumped Service $7,939 4.3.1 General Observations In a review of the 2017 Capacity Fee Model resulted in the following observations: The equity buy-in methodology used in the capacity fee calculation is appropriate for the District's wastewater system. The use of replacement cost less depreciation to determine assets values is appropriate. The exclusion of contributed assets from the calculation is appropriate to avoid double recovery of costs. The practice of different service zones is appropriate given that the District tracks pump stations and related assets separately. The 2017 Capacity Fee Model contained several small calculation errors.These included: ■ The misuse of inflation/depreciation factors for trunks and interceptors. This was a result of a wrong cell reference. ■ The identification of negative asset values. These were a result of disposal of assets, re-evaluation of assets or other similar activities. Both issues were brought to the attention of District staff and have been addressed accordingly. �j B&V PROJECT NO.195246.0100 1 APRIL 12,2018 May 3, 2018 Regular Board Meeting Agenda Packet- Page 148 of 225 Page 19 of 23 Central Contra Costa Sanitary District I WASTEWATER CAPACITY FEE REVIEW STUDY 5 Basis for Capacity Fee 5.1 INDUSTRY UNITS OF MEASURE The determination of units of measure for wastewater capacity fees have relied on several basis for many years. Residential customers are typically based on an equivalent dwelling unit while non-residential customers are based on per square footage, seats, plumbing fixture, students, beds,washing machines, etc. Table 4 shows a summary of the basis for six large wastewater agencies in the State of California. Table 4.Wastewater Capacity Fee Basis Survey Sacramento Regional County Residential—Dwelling Unit,Space(Mobile Home) Sanitation District Commercial—1,000 SF, Barber Chair, Bowling Lane, Bed, Room,Washing Machine, Fixture Unit,Average Daily Attendance,Seats Industrial—Flow,Strength East Bay Municipal Utilities District Residential—Dwelling Unit (EBMUD) Non-Residential—Flow(anticipated max monthly flow) San Francisco Public Utilities All—Meter Size and Standard Industrial Classification (SIC)code Commission (SFPUC) Sanitation Districts of Los Angeles Residential—Dwelling Unit,Space(Mobile Home) County Commercial—Room, 1,000 SF, Bed,Average Daily Attendance Institutional—Student, 1,000 SF Orange County Sanitation District Residential—Dwelling Unit Non-Residential—1,000 SF City of San Diego Residential—Dwelling Unit Non-Residential—Fixture Unit,Washing Machine,Space(for Recreation Vehicle) *The basis identified is for samples purposes only.Agency ordinances should be referenced for full list. Based on Table 4, SFPUC is the only agency that uses meter size as a basis for wastewater capacity fees. SFPUC is a combined water and wastewater service provider; therefore acquiring meter sizes and tracking changes is relatively trouble-free. Despite the simplicity, SFPUC still utilizes Standard Industrial Classifications (SIC) codes to classify businesses and industries and charges different capacity fees accordingly. 5.2 CUSTOMER CLASSES The existing wastewater capacity fee is imposed on customers based on the type of user group identified during the permitting process. When a customer applies for a new development BLACK&VEATCH CORPORATION I Basis for Capacity Fee May 3, 2018 Regular Board Meeting Agenda Packet- Page 149 of 225 Page 20 of 23 WasteWater Capacity Fee Review Study I Central Contra Costa Sanitary District permit and/or tenant improvement permit that affects the use of the property, the permit issuing agency will request that the District review the submittal and provide approval. In Ordinance 296, Exhibit A, the District identified 59 distinct user groups. The three major categories are residential,non-residential and schools. ■ Residential are dwellings designed or used as a residences with facilities for living, sleeping, cooking, dining and sanitation. Residential incorporates single family residences and multi- family residences. ■ Non-Residential are properties that are designated as commercial,industrial,or institutional uses. Non-residential incorporates, common areas,auto repair,retail sales, light industrial,warehouses,supermarkets,laudromats,etc.,to name a few. ■ Schools are properties that are designated for schools. Schools incorporate public and privates schools that might include cafeteria,gyms and showers. 5.2.1 Restaurants The District has two restaurant user groups within non-residential: 1) Restaurants - Dine-In, and 2) Restaurants - Take-Out. The first category is establishments where meals are prepared and served for consumption within the premises of the establishment. Examples include,but not limited to California Pizza Kitchen, Ruth's Chris Steak House, The Cheesecake Factory, and Olive Garden. These establishments usually have service personnel take orders at the table rather than at the counter. The second category is establishments where meals are prepared and some or all of the meals are served for consumption outside the premise of the establishment. Examples include, but not limited to,In-N-Out Burgers, Chipotle, and McDonalds. It has been identified that many restaurants provide outdoor patio dining for customers. The extent of the patio area isn't large, but dine-in establishments have increasingly used the area as an extension of their normal dining area. Therefore it is recommended that District amend its criteria and procedures for assigning capacity fees for patio dining only for the Restaurant - Dine-In user group. These are usually fine dining and fast casual establishments with dedicated patio dining square footage. Dedicated patio dining generally means sit down seating that served by dedicated service staff and use china plates and silverware. In Table 5, a survey performed on neighboring utilities found that patio dining is charged for with some agencies. Table 5. Patio Dining Survey Milli 11 East Bay Municipal Utilities District EBMUD does not charge for patio dining area specifically as their capacity fees are based on historic water consumption data and business type. Dublin San Ramon Services District DSRSD charges 50%of regular charge per square footage for the patio (DSRSD) dining when it is dedicated to the business(this rule applies to businesses like Starbucks as well if they have a dedicated outside sitting area). Dedicated represents planned seating submitted in the tenant improvement plan. gj B&V PROJECT NO.195246.0100 1 APRIL 12,2018 May 3, 2018 Regular Board Meeting Agenda Packet- Page 150 of 225 Page 21 of 23 Central Contra Costa Sanitary District I WASTEWATER CAPACITY FEE REVIEW STUDY Delta Diablo Sanitation District DDSD does not charge a fee for the patio dining area,only for the square (DDSD) footage inside the building. Union Sanitary District(USD) USD does not charge for patio dining-only charges per square foot inside the building. City of Livermore (City) The City charges for the patio dining, if it is dedicated to the restaurant, based on square footage. Ironhouse Sanitation District(ISD) ISD charges dedicated patio dining area and it is charged additionally based on the numbers of seats. Ross Valley Sanitation District RVSD does not charge for patio dining area.The patio seating does not (RVSD) really matter since the charge depends only on the number of fixtures in the premise. 5.2.2 Delicatessens The District has a Delicatessen user group within non-residential. The delicatessen category was created to account for establishments where sliced meats, cheeses, cold cuts, and salads are prepared and sold. Over the years, many delicatessens establishments have broaden their products to include the sale of hot meals similar to restaurants or the sale of groceries similar to a small supermarket. In Table 6, a survey of restaurant categories was performed on six large wastewater agencies in the State of California. Table 6. Restaurant Categories Survey Milli 11 Sacramento Regional County Restaurant—Dine-In; Restaurant Dine-In Patio Area; Restaurant—Dine-In Sanitation District and Take-Out; Restaurant—Take-Out East Bay Municipal Utilities District Food Service Establishments (EBMUD) San Francisco Public Utilities Based on Standard Industrial Classification codes Commission (SFPUC) The SIC codes under the United States Department of labor identify code 5812: Eating Places which includes 44 subcategories.Sandwich shops and Restaurants are in the same SIC code Sanitation Districts of Los Angeles Restaurant County Orange County Sanitation District Restaurants(contained in the high demand) City of San Diego No category as fixture units are used BLACK&VEATCH CORPORATION I Basis for Capacity Fee May 3, 2018 Regular Board Meeting Agenda Packet- Page 151 of 225 Page 22 of 23 WasteWater Capacity Fee Review Study I Central Contra Costa Sanitary District Based on the results of the survey, the majority of the large wastewater agencies do not separate the restaurant user group into subcategories. It has been noted that food establishments similar to delicatessen (i.e. Subway and Jersey Mike's) typically have a smaller footprint. Based on Franchise Costs' details,the average square footage for a Chili's restaurant is 6,000 SF. The average square footage for a Subway restaurant is 1,200 SF. That results in a delicatessen food establishment with a footprint of about 20 percent of the restaurant food establishment. It is recommended that the District review the wastewater strength assumptions for the delicatessen user group and consider eliminating if the strengths are found to coincide with the restaurant user group. 5.3 UNITS OF MEASURE The existing wastewater capacity fee uses three types of units of measure to apply the capacity fee to the three distinct user groups. Per the District, the unit of measure means the basic unit that quantifies the degree of use of a particular parcel. As noted in Section 3.1.4, the capacity fee is calculated on a per RUE basis which satisfies the residential user group, but the fee is modified to appropriate units of measure for non-residential and schools based on flow and strength parameters. The non-residential user group uses per 1,000 square feet (SF) of the structure and the schools user group uses per number of classrooms. Table 7 shows a sample determination of a non-residential RUE factor. Table 7. Capacity Fee Sample MI UNITS OF FLOW(GIPD) BOD(MG/L) TSS(MG/L) Single Family Dwelling Unit 200 200 215 1.000 Residences (SFR) Retail Spaces 1,000 square 56 150 165 0.259 (RS) feet FIOWRS BODRS TSSRS RUERS = Flow x (A + BODSFR B + TSSSFR C) SFR SFR SFR 1 Chili's Restaurant,<https://www.franchisechatter.com/2015/01/09/franchise-costs-detailed-estimates-of-chilis- gri I I-bar-fra n ch i se-costs-2014-fd d/>. Subway Restaurant,<https://www.franchisechatter.com/2013/05/12/franchise-startup-costs-detailed-estimates- of-subway-fra nch ise-costs-2013-fd d/>. gj B&V PROJECT NO.195246.0100 1 APRIL 12,2018 May 3, 2018 Regular Board Meeting Agenda Packet- Page 152 of 225 Page 23 of 23 Central Contra Costa Sanitary District I WASTEWATER CAPACITY FEE REVIEW STUDY Where A, B and C represent the weighted percentages of costs for flow, BOD and TSS respectively based on cost of service analysis. The flows in square footage and classroom are assumed to be derived from the State of California guidelines and amended over the years with measured flows. There are no records at this time to indicate otherwise. According to the 2017 Strength Model, the strengths were based on Table A in the Staff Proposal for Capital Improvement Fees for Non-Residential Uses memo drafted February 10, 1989. In April 1983, the State of California published the Revenue Program Guidelines for Wastewater Agencies (CA Guideline) in order to provide guidance to wastewater utilities in developing, implementing and maintaining revenue programs and implementing ordinances to comply with Federal and State regulations. Within this document, Appendix G - Representative Wastewater Flows and Loading served as guidelines in setting flows and strengths for specific customers. In reviewing the customer categories and strengths used by the District, it appears that the CA Guideline might have been a preliminary reference. In 1998, the State of California updated the guidelines,but Appendix G remained relatively unchanged. 5.3.1.1 Units of Measure Recommendation In reviewing the District's basis, they appear to be consistent with wastewater industry practices in California. The use of dwelling units, square footage and number of classrooms are widely accepted measures in the wastewater industry. Of specific interest was the capacity fee based on meter size similar to SFPUC,but after further review it appears that it does not necessarily simplify the administrative task but rather adds to it. Currently, the District has dealings with ten Building & Safety (B&S) Departments within the service area. Upon a new development or tenant improvement, the B&S Departments seek approval from the District. The conversion to meter size will add an extra layer by dealing and complexity with four water agencies. Therefore, it is recommended that the basis remain as is. It is also recommended that in the future when a cost of service analysis is performed, the District review the weighted percentages of costs associated with flow, BOD and TSS in the capacity fee calculation. It is expected that with water conservation measures and mandates imposed by the State of California, the parameters might have changed over the years. This will have a direct impact on the application of the capacity fee. BLACK&VEATCH CORPORATION I Basis for Capacity Fee May 3, 2018 Regular Board Meeting Agenda Packet- Page 153 of 225