Since 2005, Raftelis has worked with Pima County (County) on a variety of financial-related projects. Raftelis was first engaged to provide strategic financial and analytical support related to the long-term revenue and rate implications associated with the investment of approximately $1.4 billion in its wastewater system over the next 15 years. The County was faced with the extraordinary challenge of improving a significant portion of its wastewater system in order to comply with more stringent effluent quality standards imposed by State and Federal regulators and to meet the needs of a growing customer base. Raftelis, in association with Greeley & Hansen, developed an economic planning model to assess, at a high level, the long-term rate and customer impacts of various capital investment strategies and system configurations designed to adequately address regulatory requirements and provide sufficient capacity to serve both existing and projected demand. Raftelis also developed a financing plan for the capital program that considered the use of traditional public financing instruments and the use of non-traditional, alternative financing options, both public and private, that could provide a more cost-effective strategy for funding certain components of the capital program.
Based on the results of the capital planning analysis, Raftelis was retained by the County, in two separate engagements, to develop its fiscal year (FY) 2008 financial plan and to conduct a more detailed economic analysis of alternative project delivery options. The development of the FY 2008 Financial Plan included a comprehensive rate study and creation of a rate and financial planning model, to be updated on an annual basis, covering the County’s operating and maintenance (O&M) and capital improvement financing over a 10-year forecast period. The financial plan was designed to serve as a roadmap for funding capital improvements and a basis for developing rates and charges that are fair and equitable. In 2008, Raftelis was also retained by the County to update its financial plan for FY 2009 and FY 2010.
The FY 2008 and FY 2009 financial plans assumed the use of more traditional public financing instruments, such as revenue bonds and State Revolving Fund (SRF) loans, to finance the proposed capital improvements, and assumed a more traditional Design-Bid-Build (DBB) project delivery model. However, the County was interested in understanding both the economic and non-economic implications of alternative financing options and approaches to project delivery, including Design-Build (DB), Design-Build-Operate (DBO) and Design-Build-Finance-Operate (DBFO) delivery models. One of the largest projects in the capital program was the construction of a new 32 million gallon per day (MGD) water reclamation facility designed to meet all new effluent discharge requirements. It was determined that this project, in particular, should be evaluated in terms of the potential risks and benefits of alternative project delivery options to determine which option under consideration could provide the least risk and lowest probable cost.
To facilitate the quantitative aspects of the alternative project delivery analysis, Raftelis developed a Multiple Criteria Risk Model to project operating and capital costs and calculate Net Present Value (NPV) life cycle costs for design and construction of the new water reclamation facility under a base case (DBB), DB, DBO, and DBFO project delivery alternatives. Raftelis participated in several workshops with County staff to identify specific variables and risk parameters that could be quantified. These variables and risk parameters were incorporated into the Risk Model, which used Monte Carlo simulations over 5,000 trials to project risk adjusted NPV life cycle costs for each project delivery alternative. Specific variables considered included construction schedule, tax-exempt interest rates, private interest rates, private cost of equity, operating cost inflation, capital cost inflation, and discount rate among numerous others. The results of the quantitative analysis identified DBO as the project delivery alternative with the lowest risk and NPV life cycle cost.
Raftelis was also engaged by the County to conduct a comprehensive review of its connection fee assessment structure and provide a detailed evaluation of an alternative assessment structure on the basis of water meter size. The County previously assessed connection fees to residential, commercial, and industrial customers based on the fixture unit equivalent approach. Under this approach, connection fees were assessed to new structures and demolitions/renovations to existing structures that result in additional fixture units. As appropriate as it may be for assessing connection fees, the fixture unit methodology is complex and labor intensive. Raftelis considered several alternative connection fee assessment approaches including meter size (water meter); equivalent residential units (ERU); square footage; and lot size and density (per acre). Based on this evaluation, the meter size approach was identified as the most effective connection fee assessment methodology in addressing the County’s goals and objectives. Additionally, the simplicity of using water meter size as a basis of assessment appealed to County staff, and the prevalence of this approach in the industry indicates widespread understanding and acceptance. To determine the appropriate connection fee based on meter size, Raftelis first calculated the anticipated flow of a residential or commercial connection of 5/8-inch or 3/4-inch meter. The anticipated flow for a residential customer represented a projected capacity need for customers connecting to the system with the smallest meter size. Using the residential charge as the basis for calculation, the upfront fees for larger meter sizes were computed from a scale of factors related to either the capacity capability or the average customer demand of the respective meter relative to the average demand of 5/8-inch customers.
Other services provided to the County by Raftelis include the valuation of a small water reclamation facility serving a community in the County’s outlying service area. The study was conducted to support the County in negotiations with the community as it was evaluating the implications of seeking ownership of this facility.
Raftelis also conducted a comprehensive cost-of-service and rate structure analysis. The study examined the allocation of revenue requirements into flow, strength, and account components, with a focus on increasing the level of revenue recovery through the County’s fixed service charge and consolidating the number of high-strength commercial classes.
