TRN-9.05 - Utility Relocation Costs, Final Procedures for Allocation & Present Value Calculations

ARB-TRN-9.05

Betterment:  benefit that accrues to the owner of a facility as a result of relocation and replacement of the pipe or facility.  Includes extending a pipe's life, increasing a pipe's diameter (upsizing), or other system changes made strictly for the convenience of the owner.

Facilities:  for purposes of these procedures, facilities are not limited to sewer or water pipes, but include all owner facilities that need to be relocated to accommodate an initiator's project.

Initiator:  agency that manages the project requiring utility relocation.

Owner:  the City bureau that owns the facility, whether it be a water, sewer, telecommunication, or transportation facility.

Relocation costs:  includes construction costs of labor and materials to move the facility, and overhead;  and non-construction costs, including pre-design, design, engineering, and project management.

1. The owner will pay the cost of betterments made for the owner's convenience.  These include:

A.  The economic benefit of replacing a pipe or facility before it reaches the end of its useful life.  The owner's share will be the net present value of relocation costs discounted by the number of years remaining before the pipe or facility was due for replacement, with a maximum of 100 years for sewer pipes and 125 years for water pipes.

B.  The economic benefit of increasing the capacity of any system facility over and above that required by the initiator for the specific project.

C.  Any other temporary or permanent system improvement that is made for the owner's convenience and not needed for the initiator's project.

2.  The initiator will pay the cost of all relocations on streets that are improved to City standards, with the exception of items noted in #1 and #5.  In particular, the initiator will pay:

A.  The cost to increase the capacity of any pipe or facility where required by the initiator's project.

B.  The usual and ordinary costs of temporary structures or services needed to accommodate the initiator's project, like extra valves.

C.  The relocation of fire hydrants, as required by City Code (17.16.100 A.)

3.  For permit projects on streets that are being improved to City standards, the City Engineer will not require the permittee to pay for relocation of utilities.  However, the permittee will reimburse relocation costs to the owner in order to receive utility service.

4.  The owner will pay relocation costs for facilities, including necessary temporary facilities, currently located on PDOT bridges or structures, when PDOT requires relocations due to maintenance, repair or replacement of the structure.

5.  The owner will pay relocation costs of utility manholes, valves and boxes necessary for street maintenance work.

6.  The owner will pay relocation costs for projects funded through a Local Improvement District (LID) on streets being improved to City standards.

7.  Grant funding received by a project initiator should be applied to relocation costs in the same proportion that the grant is to total project costs, if allowable by the terms of the grant.

8.  Major projects are special cases.  It is assumed that the funding of relocation costs for major projects, like the streetcar and light rail projects, will be decided by City Council.

9.  These procedures should not be applied retroactively to relocation projects that have been completed.

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Additional utility costs are incurred when sewer or water facilities must be relocated or reconstructed when they have useful life remaining.  At the same time, the facility owner receives an economic benefit in that the new facility's life extends beyond that of the old facility, and lower operation and maintenance costs may be realized.

BES, PDOT, and Water agree that the allocation of relocation costs take into consideration the remaining useful life of relocated facilities.  The cost of premature relocation is the extra money spent to replace facilities today that have remaining useful life.  It is generally not the full replacement cost, although replacements must occur eventually.  Rather, it is the current replacement cost less the net present value (NPV) of that replacement cost discounted to the end of the current facility's useful life.

For example, assume it costs $1.0 million to replace a utility facility today and that facility would not ordinarily be replaced for 50 years.  The extra cost to utility ratepayers of replacing it now is the $1.0 million immediate replacement cost discounted by the NPV of $1.0 million spent 50 years from now.  The difference between today's cost and the NPV of the future replacement cost (the extra cost) is what the initiator will pay.  The facility owner will pay the NPV of the future replacement cost.

The formula for calculating the net present value of a facility is:

where n is the number of years of remaining life of the facility being replaced.

BFP recommends that a proxy for the discount rate be based on 30-year indexed securities as listed in the Wall Street Journal.  In the "Treasury Bonds, Notes and Bills" section of the paper (July 25, 2002, page C2), there are "Inflation-Indexed Treasury Securities" listed. The last entry (04/32=> April 2032) represents 30-year indexed securities.  The yield on that issue (next-to-last column) is 3.000%.

There are three reasons for using this value at the discount rate. First, it's intended to be a return in excess of inflation, and so measures what we're after. Two, it's easy to verify by all concerned, and does not require explaining a calculation methodology.  Finally, it probably won't be nearly as volatile as other measures that we've considered, since it involves a broad investor perspective of events for the next thirty years, as opposed to inflation over the last twelve months, which can jump around.

It also assumed that the maximum life of sewer pipes is 100 year old and the maximum life of water pipes is 125 years.

Using the formula with the above example results in:

PV = $1,000,000 / (1 + .03) ^ 50

PV = $1,000,000 / 4.3839

PV = $228,107

Filed for inclusion in PPD December 3, 2003.