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C paying annual existing and future capacity capital costs, including debt service requirements and depreciable assets purchased from current revenues. 3. To accumulate reserves to finance system improvements and expansion. It is important to note that state and federal grant program regulations require that grantees recover all operation and maintenance costs via user charges assessed existing system users which are proportional to the cost of service provided. Connection fee receipts cannot, therefore, be used to offset operation and maintenance costs including replacements. However, connection fee receipts can be used to offset part or all capital costs. System Buy - In Method. Under the system buy -in method, connection fees are designed to derive the original cost of each connection. The new user "buys into" the system by paying the original cost of facilities which he will use. As shown in Table 26, the original cost of the City's wastewater treatment and disposal system is estimated to be $19,201,667. Based on a design capacity of 7.6 million gallons per day (mgd) and a single - family residential discharge of 164 gallons per day (gpd), as identified in Chapter 2, there is design capacity for 46,325 equivalent single- family dwelling unit connections (7.6 mgd divided by 164 gpd). Thus, the system buy- in connection fee based on original costs for an equivalent single - family dwelling unit connection is $456 or $2.78 /gpd inclusive of contingencies at ten percent. Marginal Cost- Pricing Method. This method is based on the sound economic principal that new system users should be responsible for only those incremental costs which they cause to be incurred. Accordingly, connection fees are designed to derive the incremental cost of system expansion. In order to determine the incremental cost of system expansion, it is necessary to perform a detailed engineering analysis to determine the specific components required to increase the design capacity of flow, BOD, and SS to a specific level. This incremental cost is then divided by the number of additional equivalent single - family dwelling units which can connect to the system as a result of the addition of these incremental facilities to determine a marginal cost- pricing connection fee. However, because that type of a engineering analysis has not been performed and was not included in the scope of this study, it is assumed that the true incremental cost of wastewater treatment and disposal expansion is equal to the escalated cost, or reproduction cost new, of the City's existing wastewater treatment and disposal system. It is also assumed that the City would finance expansion on a pay -as- you -go basis without the assistance of federal and state grants and without 1 80