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CHAPTER 1 INTRODUCTION This report documents the development of a schedule of wastewater system capacity charges to recover, in part, the cost of capacity in the City of San Leandro's wastewater system from new applicants for service. Project Authorization and Objectives Municipal Financial Services (MFS) entered into an agreement with the City to develop a schedule of capacity charges for its wastewater utility. This study documents the development of wastewater system capacity charges that would be effective during 2010. The wastewater system capacity charge development process used in this study is in accordance with standard industry practices. Conceptual Approach In developing wastewater system capacity charges for the City, we have endeavored to satisfy the rational nexus criteria generally applied to these types of charges. A rational nexus -based capacity charge must: • Be rationally based on public policy that demonstrates a nexus between new development and the need to replace, expand or build facilities to accommodate it. • Not exceed the new development's proportional share of the cost of facilities needed to serve that development, after crediting it for other contributions that it has already made or will make toward that cost. • Not be arbitrary or discriminatory in its application to individuals or customer classes. To the extent that this study addresses laws, regulations or court decisions of any jurisdiction, it is not intended as a precise, detailed or thorough summary of the pertinent legal authorities. Alternative Capacity Charge System Valuation Methodologies There is no single, established method for the determination of capacity charges that is either appropriate for all utilities or eminently fair to all new applicants for service. The task of system valuation is perhaps the area of greatest variation in the development of capacity charges. There are two general methods currently employed by utilities to develop the valuation of the system. These methods can be categorized as follows: Average Cost Method Capacity charges are designed to derive the average investment per connection. This method is employed using either the historical (acquisition) value or replacement value of the existing utility system. If historical value is used, this method suffers from the fact that it is based on the original cost of the utility assets and is thus not a measure of the current cost (original cost adjusted for inflation) associated with serving a new connection. However, if the replacement value of the existing facility is used, and it includes near -term capital improvements to the utility system, then this average cost method is appropriate because it recovers the current average cost of the capacity in the utility system (including near -term capital improvements) necessary to serve a new customer. This method is most appropriate for those utilities with available capacity'in the existing system. This is the method used in this report. 1 -1