tm 6: life cycle cost analysis of water treatment …€6 page 1 tm‐6: life cycle cost analysis of...

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TM‐6: Life Cycle Cost Analysis of Water Treatment Plant Alternatives

1.0 Introduction Thistechnicalmemorandumpresentsthelifecyclecostanalysisofalternativesforwatertreatmentplantconsolidationandrepurposing.Thekeyfactorsinthisevaluationinclude:

1. Capitalcostsforfuturewatertreatmentplantupgrades;

2. Capitalcostsfornewwatertransmissionmains,orrehabilitationofexistingmains,requiredtomaintainredundantsupplyoptionsinanemergencydisruptionofservice;

3. Operatingcostsforwatertreatmentplant;

4. Energycostsforadditionalpumpingassociatedwithsupplyingwaterfromtreatmentplantsmoredistantthatthewatertreatmentplantbeingrepurposed;and

5. Theeconomicpresentworthofcapitalcostsandannualcostsforeachalternative,includingarangeofeconomicfactorsrepresentinghighandlowfuturecostinflation.

ThelifecyclecostevaluationwasperformedinconjunctionwithaseriesreviewsmeetingsandworkshopswithwholesaleandretailcustomersandDWSD.Thesereviewsandworkshopsallowedforprogressiveinputontheevaluation,theadditionofalternativesanddecisioncriteria,andthesubsequentshort‐listingofselectedalternatives.Theseriesofreviewsandworkshopsincluded:

March2013:Phase1Reportwiththeinitiallifecyclecostevaluation

MarchandApril:MasterPlanSteeringTeamandRetailCustomerSteeringCommitteemeetingstodiscusstreatmentplanconsolidationandrepurposing

May2014:BoardofWaterCommissionersWorkshop

May2014:DWSDManagementTeamWorkshop

June2014:WholesaleCustomerandCustomers’EngineersWorkshop

July2014:MasterPlanSteeringTeamdiscussionofupdateoflifecyclecostforselectedalternatives

August2014:WholesaleCustomers,AnalyticalWorkGroupandDWSDWorkshop.

ThelifecyclecostcalculationsforallalternativesareincludedinAttachment1tothisTM.Thelistofalternativespriortoshort‐listingincludedthefollowing:

1. MaintainallfiveplantsatthecurrentMDEQratedcapacityof1,720MGD

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2. RepurposetheNortheastplant,andupgraderemainingplantstotheircurrentMDEQratedcapacity.

3. RepurposetheSouthwestplant,andupgraderemainingplantstotheircurrentMDEQratedcapacity.

4. RepurposetheNortheastandSouthwestplant,andupgraderemainingplantstotheircurrentMDEQratedcapacity.

5. RepurposetheSpringwellsplant,andupgraderemainingplantstotheircurrentMDEQratedcapacity.

6. Reducethecapacityofallplantssothatthesumofallcapacitiesmatchesprojectedfuturewaterdemandsintheplanningperiod.

7. ExpandthecapacityofLakeHuronandmaintainthecurrentcapacityofWaterWorksPark

8. RepurposetheLakeHuronplant,andupgraderemainingplantstotheircurrentMDEQratedcapacity.

FouralternativeswereselectedforfurtherevaluationduringtheworkshopsinMayandJune:

1. Baseline—Maintainallfiveplants,butreducetheratedcapacityto1,000MGD

2. Alternative1—RepurposeNortheastandreduceotherplantsforatotalof1,000MGD

3. Alternative2—RepurposeNortheastandSouthwest,totalcapacityof1,000MGD

4. Alternative3—RepurposeSpringwells,reduceotherplantstoatotalof1,000MGD

2.0 Guiding Principles DiscussionsattheworkshopsinMayandJuneandatothersteeringcommitteemeetingsresultedinaseriesofinsights,observationsandconclusionsaboutplantconsolidationandrepurposing.Thesearecapturedbelowinalistof“guidingprinciples”thatsetthecontextfortheidentificationofalternativesandthescopeofthelifecyclecostcalculations:

1. TheWaterWorksParkplantisthemostmodernplant,anditisstrategicallylocatedtoprovidepre‐treatmentfortwootherplants.Recommendedyardpipingimprovementswillallowthisplanttooperateatdesigncapacity.

2. TheLakeHuronplantisarelativelynewplant,anditslocationprovidesabundanthighqualitywaterdirectlyfromLakeHuron.Theplantisingoodconditionwithlowcapitalneeds.Recommendedoperatingchangeswillreducethecostofproducingandpumpingwaterfromthisfacilityinthefuture.


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3. Threeintakesshouldbepreservedinordertoprovideflexibilityforfuturesupplyneeds,maintenanceofintakestructures,andresponsetotemporarysourcewatersituationsthatmayrequireanemergencyresponse.

4. ConsolidatingplantsshouldreduceDWSD’sfixedcostsforwatertreatment.

5. Decisionsonconsolidationshouldbebasedonassetmanagementprinciples;makemaximumuseofviableexistinginfrastructure,andabandonorrepurposemarginalassetstorenewtheassetlifeforanewobjective.

6. Recognizingthatconsolidationandrepurposingwillrequireseveralyears,theimplementationshouldbedoneinaprogressive,step‐wiseapproachthatprovidesbenefitswitheachstep.

7. ConsolidationandrepurposingshouldsupportinnovativeproposalsthatmayemergefromotherinitiativesfortheBlueEconomyandGreenInfrastructure.

8. Thenationalandregionaltrendisdecliningpercapitawaterdemand,andthereareambitiousregionalgoalsforreductioninnon‐revenuewater.Theconsolidationandrepurposingplanshouldbereviewedat5‐yearintervalstore‐projectthetreatmentcapacityrequirements,whichcouldbelowerinthefuture.

3.0 Life Cycle Cost Analysis Thelifecyclecostanalysisrequiredtheconsiderationofcapitalcosts,operatingcosts,andthestagingofwhenconstructionwouldoccur.Thedifferentalternativesforwaterplantclosureshavesignificantlydifferentoperatingandcapitalcosts.Inordertocompareallalternativesonaconsistenteconomicbasis,thelifecyclecostanalysisconsidersthefulltimeseriesofnewcapital,replacement,salvage,andannualoperatingcostsoverthe20‐yearplanningperiod.Allcostsinthetimeseriesarethenrepresentedbyonenumber,calledthePresentWorth.

ThealternativewiththelowestPresentWorthcostisthemostcost‐effectiveinconsiderationofexpendituresandbenefits.Indevelopingthedifferentalternatives,itisimportantthatallmeetthesamethresholdoflevelofservicefordrinkingwaterquality,wholesalecustomercontractpressureandvolumeandredundancy.

Notallfactorsintheplantclosureevaluationcanbeequatedintoannualcostsandcapitalcosts.Therearenon‐monetaryfactors,suchaspotentialfuturescenariosforregulationsandgrowth,andcertainrisksthatarebestunderstoodasadditionaldecisioncriteriaoutsideofthelifecyclecostevaluation.Thesenon‐monetaryfactorsarediscussedinChapter6ofthisreport.

ThelifecyclecostevaluationwasperformedinaccordancewiththeUnitedStatesOfficeofManagementandBudgetCircularA‐94,revised,titled:“GuidelinesandDiscountRatesforBenefit‐CostAnalysisofFederalPrograms.”Theseguidelinesaregenerallyusedinprogramswhenfederalfundingisprovidedforwaterandtransportationprojects.

InthecontextoftheOMBCircularA‐94guidelines,thediscountrateisanimportanteconomicfactor.


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ThisfactorisusedtotranslatefutureexpendituresandbenefitsovertimetothesinglePresentWorthvaluedescribedabove.InordertocomputePresentWorth,itisnecessarytodiscountfuturebenefitsandcosts.TheOMBguidanceontheuseofdiscountratesispresentedbelow:

“Thisdiscountingreflectsthetimevalueofmoney.Benefitsandcostsareworthmoreiftheyareexperiencedsooner.Allfuturebenefitsandcosts,includingnon‐monetizedbenefitsandcosts,shouldbediscounted.Thehigherthediscountrate,theloweristhepresentvalueoffuturecashflows.Fortypicalinvestments,withcostsconcentratedinearlyperiodsandbenefitsfollowinginlaterperiods,raisingthediscountratetendstoreducethenetpresentvalue.”

Thealternativesarestructuredsothatbenefitsareconsistentforallalternatives,asmeasuredbythelevelofservicegoals.ThelargestuncertaintyforDWSDanditscustomersishowcostscouldriseinthefuture,inordertoachievethelevelofservicebenefits.Futurecostsincludeconstruction,financing,andenergy,chemical,laborandbenefits.

Inordertoaddresstheuncertaintyaroundfuturecosts,thelifecycleevaluationwasperformedtwice,oncewithalowerdiscountrate,thenagainwithahigherdiscountrate.Thelowdiscountratewas4percentperyear,andthehighratewas7percentperyear.

ThisrangeofratesistypicaloftherangeofvaluescurrentlyusedintheUnitedStatesforcost‐benefitstudiesperformedinaccordancewithCircularA‐94.Thehigherdiscountratereflectsascenarioofcostsincreasingatahigherratethanhasbeenthecaseoverthelast5years.Thelowerdiscountratereflectsascenarioofcostsincreasingatapproximatelythesamerateasoverthelast5years.

TablesAandBinAttachment1presentthecalculationsforthelifecyclecostsforallalternatives.TableApresentsthecalculationsforthe8originalalternativesandTableBpresentsthecalculationsforthe4selectedalternatives.Bothtablesusethesamebasiccalculationmethodology.However,thecalculationsfortheselectedalternativesincludeseveralnewconsiderationsthatwererequestedduringtheworkshops.Thesectionsbelowdiscussthesenewconsiderations.

3.1 Labor Costs

TherewereseveralquestionsattheJune2014wholesalecustomerworkshopregardingthebasisoflabor,overtime,andbenefitscosts.TheoriginalcalculationsusedactualFY2013costsforallofthesecategories.ActualcostsforFY2014wererecentlyobtained.AcomparisonofFY2013actualcosts,FY2014budgetcosts,andFY2014actualcostsisshownbelowinTable3‐1.

Table 3‐1: Labor Cost Comparisons Related to Water Production

FY2013 Actual FY2014 Budget FY2014 Actual

Water Production $12,504,000 $18,427,000 $13,340,000

Asof2014,salaryandwages,overtimeandcontractcostsremainedinfluxduetooperationaloptimizationeffortsthatareunderwaybytheDWSD.Thebenefitsstructurewasalsofluidduetofinancialscenariosdrivenbytheongoingbankruptcyproceedings.


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Giventhisdynamicsituation,thesensitivityofthelifecyclecostanalysiswasexaminedrelativetotheactualandbudgetcostsshownabove.ResultsforeachalternativearepresentedbelowinTable3‐2.

Table 3‐2: Present Worth Summary at 4% Discount Rate for Various Annual Labor Costs

Alternative FY2013 Actual FY2014 Actual FY2014 Budget

$ billions $ billions $ billions

Baseline 1.497 1.509 1.582

Alternative 1 1.391 1.397 1.455

Alternative 2 1.398 1.402 1.446

Alternative 3 1.488 1.499 1.558

3.2 Energy Costs

Duringtheworkshops,itwasnotedthattheenergycalculationswerebasedontheassumptionthatallflowsfromrepurposedplantswouldneedtobere‐pumped.Thisisaconservativeassumption,becauseaportionofthewaterpumpedfromoneplantwouldreachtheserviceareaoftheformerplantwithoutdoublepumping.Thecurrentlifecyclecostanalysiswiththeconservativeassumptiononsecondpumpingshowedincreasesof7,10,and16percentforenergycostscomparedtothebaseline.

Atthistime,theuseofthe2035hydraulicmodelhasnotprogressedfarenoughtocalculatetheaverageannualchangesinenergycostsforeachalternative.Therefore,thecurrentversionoftheanalysisleavestheenergycoststhesameasintheoriginalanalysis,andasensitivityanalysiswasperformed,andisshownintheTable3‐3below.

Table 3‐3: Present Worth Summary at 4% and 7% Discount Rates for Various Annual Energy Costs (in $billions)

Alternative FY2013 Actual 25% Less Double Pumping 50% Less Double Pumping

$ billions 4% 7% 4% 7% 4% 7%

Baseline 1.497 1.161 1.497 1.161 1.497 1.161

Alternative 1 1.391 1.079 1.380 1.070 1.367 1.060

Alternative 2 1.398 1.098 1.382 1.089 1.366 1.074

Alternative 3 1.488 1.179 1.469 1.164 1.449 1.148

Forallscenarios,thelowestcostalternativesremainAlternatives1and2.

3.3 Chemicals

Thereisnochangeincostforchemicalsfromtheearlieranalysis.ItisexpectedthatchemicalcostswillbereducedfortheLakeHuronplantinthefuture,ifthisplantisconvertedtoadirectfiltrationprocessforamaximumdaycapacityofapproximately320MGD.Suchachangewouldreduceoperatingcosts,butitwouldnotimpacttherelativerankingofthealternativesinthelifecyclecostanalysis.


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3.4 Maintenance and Other

Thereisnochangeinthesecostsfromearlieranalysis.Theycontinuetobebasedonthefiscalyear2013costsforresidualshandlingandO&Mrelatedrepairandreplacementcostsateachplant.

3.5 Plants

SincetheoriginalpresentationofwatertreatmentplantupgradecostsinMarch2014,themasterplanningteamandDWSDhavefurtherevaluatedandrefinedtheneedsassessmentforeachplant.TablesB‐12toB‐16presentaworksheetforeachplantshowingtheresultsoftheneedsassessment,thesourceoftheinformation,andhoweachtypeofcostwashandledinthelifecyclecostanalysis.

Theneedsassessmentnumbersarebasedonrestoringthefullcapacityofeachplant.However,withtheexceptionoftheWaterWorksParkplant,allalternativesarebasedonafuturecapacitythatislowerthanthecurrentdesigncapacity.Therefore,theneedsassessmentestimatesarepro‐rateddownbasedontheestimatedfuturecapacity.Therearethreetypesofpro‐ratingsituations:

1. Coststhatarefixedregardlessoftherangeofplantcapacitybeingconsidered.

2. Costsaregenerallyproportionaltoplantcapacity.Notethatafactorof10%wasaddedwhenreducingtheestimatedcostforreducedcapacityateachplan,toallowforadiseconomyofsmallerscale.

3. Coststhatarenotincludedinthelifecyclecostanalysisbecausetheseareforhighliftpumpingorotherimprovementsthatwillbeneededregardlessofplantconsolidation.(NotethatthecurrentcontractforfilterrehabilitationattheSpringwellsplanthasbeenincludedinthiscategory.)

Thehydraulicmodelisusedineachofthesealternativestodeterminetheprobablecapacityrequiredateachplant,basedonatotalmaximumdaydemandof1,000MGD.ThesecapacitiesareshownonTable3‐4.Thesecapacitieswerethenusedtoreducetheplantrehabilitationcostbyproratingtheoriginalcostsforrestoringtheplantstotheircurrentratedcapacities.Indoingthisprorationcalculation,anestimatewasmadeforfixedcoststhatwouldnotchangewithincrementalchangesincapacity,suchaselectricalandHVACsystems,vscoststhatareproportionaltocapacity.

Table 3‐4: Model Simulated Water Treatment Plant Capacities for Selected Alternatives

Water Treatment Plant

Baseline – Reduced WTP Capacities (all plants operating)

Alternative 1 – Northeast WTP Repurposed and others reduced

Alternative 2 –Northeast WTP & Southwest WTP Repurposed and others reduced

Alternative 1 – Springwells WTP Repurposed and others reduced

Lake Huron 285 314 319 322

Northeast 145 60 (1) 60 (1) 300

Southwest 152 123 70 (1) 140

Springwells 186 341 444 262 (1)

Waterworks 232 222 237 238

Total 1000 1000 1000 1000 (1) Flow rate from plant that is proposed to be used as a pumping station. Treatment processes to be closed.


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3.6 Regulatory Compliance & Inventory

AttheworkshopinMay,DWSDrequestedthatthecostofregulatorycomplianceandthecostofequipmentandsupplyinventoryforeachplantbeincludedinthecostanalysis.Theprojectteamresearchedthesecosts,andthefollowingapproachwasused:

CapitalcostsforpotentialfutureregulationswereapproximatedbyincludingestimatestoinstallUV,ozoneandchlorinegasconversionateachplant(exceptforWaterWorksParkwhichhasozonedisinfection).Thesecostswereaddedandincorporatea50%probabilitythattheseinvestmentswouldbemandatedduringtheplanningperiod.

Compliancereporting:WaterQualityGroupstaffcostsandlabcostswereincludedinthepreviousanalysis.Thelatestanalysisaddsthecostoflaborfor1.0fulltimeequivalent(FTE)forheadquartersstaffperplantperyeartohandlecompliancerelatedissues.

Allsuppliesandsparepartsarestoredattheplants,sothereisnostoragecost.

TheMaterialsManagementGroupintheFinanceDivisionincluded38staff.BasedondiscussionwithDWSDitwasagreedthattheefforttomanageinventoryforeachplantcanbeestimatedbyallowingfor1.0FTEperplantperyearforstaffintheMaterialsManagementGroup.

3.7 Transmission Mains

Anupdatedsetofmapshasbeenpreparedtoshowthenewinter‐plantwatertransmissionmains.ThesemapsareprovidedinAttachmentC.Newmainswereidentifiedwherethehydraulicmodelshowedthatvelocityexceeded10feetpersecondorheadlossexceeds3feetper1,000feet.

ThecostoftheGarlandMainReplacement($68million)hasbeenadded,tothetwoalternativesthatincluderepurposingtheNortheastwatertreatmentplant.Also,consistentwithearlieranalysisoftheoriginal8alternatives,thecostoftheWaterWorksPark(WWP)YardPipingandMeteringProject($38million)isincludedasatransmissioncostforallalternatives,becausethisprojectwillallowtheWWPplanttoconveythefullplantcapacityintothetransmissionsystem.

Thecostforanew,dedicatedrawwatertransmissionmainfromSouthwesttoSpringwellshasbeenincluded,inordertopreservetheintakeatFightingIsland.ThisisasubstantialnewcostforthealternativeofrepurposingtheSouthwestplantwhilepreservingtheintake.(ThepreviousanalysisofalternativesinTableAproposedtohandletherawwatertransmissionfromSouthwesttoSpringwellsasanemergencyprocedurewithvalveoperationsonexistingmains,ratherthandedicatinganewtransmissionmain.)

3.8 Life Cycle Cost Factors – Salvage Value

Onecommentfromtheworkshopswasthatsalvagevalueshouldbeshownmoreclearly.Salvagevaluesarenowshownontheworksheettitle“LCAFactors”.Salvagevaluecalculationisbasedonaservicelifeof100yearsforpipelinesandbuildings,andaservicelifeof20yearsforelectricalandmechanicalequipment.Thesalvagevalueswerecalculatedasifnewwatermainconstructioniscompletedin2020andwatertreatmentplantupgradesarecompletedin2025.Thesalvagevalueis


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calculatedforthefractionofremainingservicelifeattheendoftheplanningperiod,2035.ThesecalculationsareshowninTableB‐9.

Additionalanalysiswasperformed,basedonarequestattheAWGworkshop,tocomparethelifecyclecostanalysiswithandwithoutaccountingforsalvagevalues.TheresultsofthiscomparisonareshownbelowinTable3‐5.Notethattherankingoftwoalternativesswitcheswhensalvagevalueisnotincluded.Thesetwoalternativesalsoswitchrankingforcertainothersensitivityanalyses.Duetothissensitivity,itisrecommendedthatre‐purposingbedoneintwophases.Inthefirstphase,completetherepurposingofNortheastby2020;inthesecondphasethenre‐examineattheeconomicsofrepurposingtheSouthwestplantbetween2020and2025.

Table 3‐5: Present Worth Summary at 4% and 7% Discount Rates with and without Salvage Value

Alternative

Present Worth at 4% Discount Rate ($ Millions)

With Salvage Value Without Salvage ValueBaseline: Reduce All Plants to total of 1,000 MGD $1,530 $1,705 Repurpose Northeast WTP; total capacity of all plants = 1,000 MGD $1,443 $1,615 Repurpose Northeast and Southwest WTPs total capacity of all plants = 1,000 MGD $1.439 $1,646 Repurpose Springwells WTP total capacity of all plants = 1,000 MGD $1,489 $1,691

4.0 Decommission and Re‐commission Cost Example AquestionwasreceivedattheAugust2014workshopregardingthecosttobringaplantbackon‐lineafterdecommissioningit.Themasterplanteamevaluatedthisquestionbydevelopingthecoststodecommission80MGDoffiltrationcapacityateithertheLakeHuronorSpringwellsWTPandthenre‐commissionthatcapacityafteraperiodof20years.Theplanningteamalsoevaluatedthecosttomaintaintreatmentoperationsfor80MGDoverthesameperiod.ThecostestimatesanddetailsareprovidedinTablesB‐18toB‐20.

Resultsofthiscostanalysisshowthatthepresentworthcostestimatetooperate80MGDofconventionalfiltrationbasinsfor20yearsisapproximately$3.8to$4.7milliondollarsdependingoninterestrateapplied(7%v.4%respectively).Thedecommissioningandre‐commissioningpresentworthcostestimatestotaled$1.4to$2.5milliondollars.Thusthecosttodecommission,thenrecommissioninthefuture,ifnecessary,isapproximatelyhalfthecostofoperatingthefiltersinanticipationofhavingthecapacityavailable,ifneededin20years.ThecostestimatesaredetailedinTablesB‐18toB‐20inAttachment1.

5.0 Updated Cost of Original Alternative to Maintain All 5 Plants at MDEQ Rated Capacity

Table6‐6inChapter6providesanoverallsummaryofthelifecyclecostanalysisplusnon‐monetaryfactors.Thefirstalternativetitled“MaintainAll5PlantsatCurrentMDEQRatedCapacity”istheoriginalfirstalternativethatwasevaluatedintheMarch2014lifecyclecostanalysis.Thepresent


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worthcostofthisalternativeshowninTableA‐1is$1,628millionanditsannualcostis$48.57million.

Theevaluationoftheselectedalternativesincludedadditionalcostsforregulatorycomplianceandmaterialsinventorythatwerenotconsideredintheoriginalscreeningofalternatives.Table5‐1belowshowstheseadditionalcosts:

Table 5‐1: Adjusted Cost for Maintaining All 5 Plants at Current MDEQ Rated Capacity ($1,000s) Present Worth Cost

(4% discount rate)Total Annual Cost

Original Total shown in Table A‐1. $1,628,000 $48,570

Additional Cost for Regulatory Compliance $398,000 6,100

Additional Cost for Materials Inventory 3,000 200

New Total shown in Table 6‐6 $2,029,000 $54,870

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Attachment A


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Attachment B


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Attachment C


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