1. Life-Cycle Cost Analysis for Planning a Capital Project Iowa League of Cities Annual Conference September 2015 Kelley BrownSteve Troyer, P.E. City AdministratorFOX Engineering Grimes, Iowa

2. 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

3. 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

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

5. 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

6. 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

7. 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

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

9. 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?

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

11. 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

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

13. 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

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

15. 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

16. 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

17. Grimes Water System – 1986 study  Initial costs - DMWW - $994,000 - Shallow Wells - $825,000  Long term life-cycle costs - DMWW - $7.8M over 20 years - Shallow wells - $4.8M over 20 years  Water rates increased 30% to finance shallow wells

18. 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

19. 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

20. 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.

21. 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

22. 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.

23. 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

24. 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

25. 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?

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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.

34. 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 $1M spent by contractor to free the bit - Started drilling a new well - one year later pumping water

35. 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

36. 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

37. 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 pH 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?

38. 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

39. 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

40. 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

41. 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

42. 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

43. 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$0.190$0.193$0.383 Costs are in millions of dollars

44. 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

45. 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

46. 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

47. QUESTIONS?