LifeCycle Cost Analysis for Planning a Capital Project

Life-Cycle Cost Analysis for Planning a Capital Project Iowa League of Cities Annual Conference September 2015 Kelley Brown City Administrator Grimes, Iowa Steve Troyer, P. E. FOX Engineering

Life-Cycle Cost Analysis § § § What is LCCA? What is involved in LCCA? Why is it important? How can it benefit me? Grimes water system case study

Life-Cycle Cost Analysis (LCCA) § Engineering economic analysis to assess total cost of ownership of a project § Includes initial capital investment (design & construction) plus on-going operation & maintenance costs § Based on expected life of project

Life-Cycle Cost Analysis (LCCA) § Involves engineering art and science § Aids the decision making process § Does NOT provide the final answer!

Life-Cycle Cost Analysis (LCCA) § Compares economic merits of alternatives § Considers all of the relevant costs § Helps identify the true low cost option § Does not account for differences in benefits

Why Use LCCA? § Helps overcome and unify varying goals… - Elected officials want the “cheapest” option - Managers want to minimize annual costs - Operators want the most reliable, easiest to maintain, and highest quality § Helps identify the true low cost option

Life-Cycle Cost Analysis (LCCA) § § § § Identify Problem Develop Alternatives Determine appropriate life cycle Estimate capital cost Identify & estimate the annual costs Estimate end-of-life costs/value Determine present value / Life-Cycle Cost Analyze results

Life-Cycle Cost Analysis (LCCA) § Identify problem § Develop Alternatives - Determine needs - Established goals - Identify alternatives that § Solve problems § Meet needs § Accomplish goals

Life-Cycle Cost Analysis (LCCA) § Determine appropriate life-cycle - What is the anticipated life of the improvements? - Will changing conditions affect evaluation period? - Will technology changes affect the life? - Will regulatory changes affect the life?

Life-Cycle Cost Analysis (LCCA) § Estimate capital cost - Construction cost Equipment purchase Land Design Permitting Administrative Legal

Life-Cycle Cost Analysis (LCCA) § Identify and estimate annual costs - Operating costs – staffing, management, electricity, gas, water, chemicals, waste disposal - Maintenance costs – preventative, corrective, rebuilds, periodic replacement

Life-Cycle Cost Analysis (LCCA) § Estimate end-of-life costs/value - Clean-up and disposal Demolition or decommissioning Value of structures Value of equipment

Life-Cycle Cost Analysis (LCCA) § Compute Life-Cycle Cost - Determine discount & inflation rate - Calculate net present value (NPV) of annual costs and one time costs - Calculate NPV of end-of-life costs - Calculate total NPV - Determine equivalent annual cost

Life-Cycle Cost Analysis (LCCA) § Analyze results - Compare NPV or EAC for each alternative - Conduct sensitivity analysis

Life-Cycle Cost Analysis (LCCA) § LCCA does not give the FINAL answer § Many other things to consider - Risk Reliability Water Quality / Environmental Concerns Political Concerns Budgets

Grimes Water System § Water Supply - Initially had 3 shallow wells - In 1966 constructed first Jordan – 2, 650 Ft - Blended Jordan and 1 Shallow well § 1986 first Water Feasibility Study - DMWW connection through Urbandale - Shallow wells north of town

Grimes Water System – 1986 study § Initial costs - DMWW - $994, 000 - Shallow Wells - $825, 000 § Long term life-cycle costs - DMWW - $7. 8 M over 20 years - Shallow wells - $4. 8 M over 20 years § Water rates increased 30% to finance shallow wells

Grimes Water System – 1996 -1997 § FOX is hired to update water facility plan - Only progress made from 1986 as 30% water rate increase - Study projected population to be 10, 800 in 2020 ( current population estimate is 11, 000 ) § 0. 72 MGD Jordan well is city’s sole source

Grimes Water System – 1996 -1997 § 3 OPTIONS - Lime softening of the Shallow wells - Plant along Hwy 141 - Plant by Wastewater plant - Removal of only Iron and Manganese - Same hardness as the current Jordan well - Connection with DMWW - Buy purchase capacity to buy down rate - No purchase capacity

Grimes Water System – 1996 -1997 § Factors considered - Operations and maintenance costs - Energy, chemicals, labor, cost data from similar facilities, quotes from chemical suppliers and published data. - Non-economic factors were considered - Land requirements, Operational requirements, Reliability, Flexibility, Monitoring requirements, Finished water quality.

Grimes Water System Capital Cost NPV O&M Costs NPV Salvage NPV Equip. Replace Total NPV DMWW $3. 126 $2. 946 ($0. 422) --- $5. 650 Limes Softening Plant $4. 821 $2. 873 ($0. 351) $0. 088 $7. 431 Iron & Manganese Removal Plant $3. 806 $1. 840 ($0. 294) $0. 096 $5. 448 Costs are in millions of dollars

Grimes Water System – 1996 -1997 § Political impacts - 1993 DMWW flooded – Grimes one of few towns with water - Fastest growing towns with control over our water supply - Quality of Jordan motivated interest in better water with no odor or taste concerns - Although Lime Softening was higher CC opted to drill new shallow wells and build a plant on wastewater treatment plant site.

Grimes Water System – 1996 -1997 § Water rates - Although being independent versus dependent on DMWW was the biggest decision effecting the long term impact on our community, the new water rates was the largest political hurdle to overcome. - Water went from $4. 17/1000 and $2. 01/1000 to $7. 23/1000 - Sewer went from $3. 30/1000 and $2. 24/1000 to $5. 76/1000 - Rates re-evaluated every few years

Grimes Water System – Xenia § 2007 Grimes approached by Xenia - Xenia wanted to buy the water system and incorporate it into their overall system - Hired an independent CPA to evaluate the financial impacts. - Capital value of the City wasn’t taken into account - Economic housing crisis - water revenue additional source to subsidize tax revenue if needed - Council opted to retain ownership of water system

Grimes Water System – 2011 § FOX updates water facility plan - Population has grown faster than expected - Debt from original water plant hasn’t been retired – increase water rates sooner than desired - Old Jordan well convert to ASR? - Expand the current plant sooner than expected?

Grimes Water System – Case Study 1 § Identify Problem - Planning for additional capacity § Develop Alternatives - Expand plant - Additional 2 MGD of treatment capacity - Aquifer Storage & Recovery (ASR) Well - Increase peak day supply capacity by 1 MGD - Delay plant expansion until 2019 - Note that alternatives are not equal

Grimes Water System – Case Study 1 § Determine Life-Cycle - 20 years § Estimate Capital Cost - Expand plant - $11. 8 million - Annualized cost - $793, 000 per year - ASR Well - $1. 5 million - Annualized cost - $101, 000 per year

Grimes Water System – Case Study 1 § Identify & Estimate Annual Cost - Expanded Plant – labor, electrical power, chemical, equipment maint. /repair, etc. - $97, 000 per year - ASR – treat, injection, recovery, chemicals, labor, equipment maint. /repair, etc. - $97, 000 + $54, 000 = $151, 000 per year

Grimes Water System – Case Study 1 § Estimate End-of-Life Cost / Value - Expand plant – Salvage Value = $3. 54 million - $132, 000 per year - ASR Well – Salvage Value = $0. 3 million - $11, 000 per year

Grimes Water System – Case Study 1 § Determine Life-Cycle Cost - Equivalent Annual Cost = Capital Cost + O&M cost – Salvage Value - Expanded Plant - EAC = $793, 000 + $97, 000 - $132, 000 - EAC = $758, 000 - ASR - EAC = $101, 000 + $151, 000 - $11, 000 - EAC = $241, 000

Grimes Water System – Case Study 1 § Analyze Results - EAC basis ASR is about $517, 000 per year less - BUT… alternatives are not equal - Other considerations - Risk - Water quality - Deferred cost

Grimes Water System - Challenges § Population growth - 1994 – population 3, 000 - 2015 – population 11, 000 - 2030 – projected population 27, 000 § Increasing Water Demands - 2010 – ADD = 0. 79 MGD; PDD = 1. 28 MGD - 2012 – 2014: ADD = 1. 0 MGD; PDD = 2. 0 MGD

Grimes Water System – Drought § 2012 beginning of three year drought - Level in three shallow wells decreasing with little recovery - What is long term viability of the shallow wells? - Water mitigation plan developed and put into place - 2013 by late season contractors couldn’t place sod in residential sites because of water shortage - Council decides to drill new Jordan well.

Grimes Water System – Jordan § Jordan well anticipated completion Nov 2013 - Drilling ahead of schedule until a 104’ section breaks 1, 865 feet below ground. - When a drill bit breaks they “fish” to get it back out. - Vibration used to break it loose Super-crane with mega-force to lift it out Chemicals to dissolve the “loose pack” around the bit Explosives Over $1 M spent by contractor to free the bit Started drilling a new well - one year later pumping water

Grimes Water System – Xenia § Alternate water supplies - City reinitiates discussions with Xenia about an emergency water supply - Establish an emergency connection on their 8” water main - Agree to supply 400 GPM or about 576, 000 per day only in emergency situations

Grimes Water System – Stressful § Stressful times - Shallow well levels drop with little to no recovery Drill Jordan well and drill bit breaks Establish an emergency connection with Xenia Convert old Jordan to ASR but what is the timing? Drought continues to the extent new homes aren’t allowed to place sod - Long term future? Hire Hydrologist to evaluate the Beaver Creek aquifer and viability of the shallow wells

Grimes Water System – Hard water § Chemistry of the water changes - Lime softening plant made “soft” water - Over time the hardness of raw shallow well water increased - Jordan well constructed – also hard water - Combination of the water supplies and the p. H changed enough that we can’t get all the calcium out so water leaves white spots and residue - New set of complaints…. What’s next?

Grimes Water System – Case Study 2 § Identify Problem - Finished water quality deteriorating - Jordan well - Deteriorating quality shallow wells - Hardness: > 600 mg/L in raw; finished water > 300 mg/L - Sulfates: very high in Jordan > 600 mg/L; shallow wells > 300 mg/L - TDS & Ammonia

Grimes Water System – Case Study 2 § Develop Alternatives - Add Soda Ash to remove more hardness - Add Caustic to remove more hardness - Add RO treatment to remove more hardness & other constituents § Determine Life-Cycle - 20 years

Grimes Water System – Case Study 2 § Estimate Capital Cost - Soda Ash - $1. 350 million - Annualized cost - $83, 000 per year - Caustic - $0. 647 million - Annualized cost - $40, 000 per year - RO - $3. 100 million - Annualized cost - $190, 000 per year

Grimes Water System – Case Study 2 § Identify & Estimate Annual Cost - Soda Ash – labor, chemical, equipment maint. /repair, sludge disposal - $436, 000 per year - Caustic – labor, chemical, equipment maint. /repair, sludge disposal - $462, 000 per year - RO – labor, power, chemicals, membrane replacement, equipment maint. /repair - $193, 000 per year

Grimes Water System – Case Study 2 § Estimate End-of-Life Cost - Similar salvage value for all three - Ignored salvage valve § Determine Life-Cycle Cost - Sum all annual costs

Grimes Water System – Case Study 2 Capital Cost Annualized Capital Cost Annual O&M Total EAC Soda Ash $1. 350 $0. 083 $0. 436 $0. 519 Caustic $0. 647 $0. 040 $0. 462 $0. 502 Reverse Osmosis $3. 100 $0. 193 $0. 383 Costs are in millions of dollars

Grimes Water System – Case Study 2 § Analyze Results - Although significantly higher capital cost, RO has much lower operating cost - Annual “savings” of $119, 000 - Additional benefits - Improved water quality - Increased production

Grimes Water System – Today - ASR – challenges with the pumps and motors - Negotiating with Xenia for a more permanent agreement for a consistent water use versus emergency connection - RO trial - Moved up construction of new water plant and reviewing financial needs. - Hydrologists are completing report on recommendations of future water supply - State is looking at long term viability of the Jordan

Grimes Water System – thank you - Life cycle cost analysis should be a life-long analysis “SUCCESS IS NOT FINAL, FAILURE IS NOT FATAL; IT IS THE COURAGE TO CONTINUE THAT COUNTS. ” Winston Churchill

QUESTIONS?