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Summary Memorandum <br />Re: Sewer Revenue Adequacy <br />October 21, 2021 <br />Table 6: Projected Annual Contribution to Renewal/Replacement Capital Reserves <br /> 2021 2022 2023 2024 2025 2026 <br />Estimated Annual <br />$1,656,777 $1,814,565 $1,870,802 $1,928,781 $1,988,555 $1,814,565 <br />Depreciation <br />Less Debt Service Principal $(442,228) <br />$(453,284) $(520,000) $(520,000) $(530,000) $(535,000) <br />Less Rate-Funded Capital $(135,000) <br />$(624,800) $(382,372) $(393,843) $(405,658) $(417,828) <br />Net Contribution to Capital <br />$1,079,549 $664,992 $912,193 $956,959 <br />$993,123 $1,035,727 <br />Reserve <br />While funding depreciation is the minimum standard for full-cost pricing, it is just one approach <br />to capital reserve funding. Due to inflationary factors, funding depreciation based on the original <br />cost of an asset will not generally result in the generation of adequate funds to make full <br />t for a <br />prescribed useful life, and in reality, can remain in use much longer or shorter than general <br />guidelines would predict. As a result, the approach to capital R&R reserve funding is a utility- <br />specific choice that warrants discussion amongst the utility managers and decision makers. <br />There are generally three broad approaches, summarized in Figure 3. <br /> <br />Figure 3: Capital Reserve Funding Strategies <br />The first approach is what is previously described, whereby depreciation is measured against <br />principal payment and rate-funded capital to develop a reserve contribution that ensures the <br />depreciation is indexed to account for the effect of inflation. This approach can involve indexing <br />current depreciation values, or in cases where the utility has a well-developed CIP that accounts <br />for the future cost of replacement, can involve ingthe future replacement value to <br />result in an annual R&R contribution that is reflective of the future capital cost. The third <br />approach is the most specific and involves a well-defined CIP based on an understanding of <br />condition and realistic useful lives for the assets. For the purpose of this study, scenarios have <br />been developed that base R&R reserve contributions on straight-line depreciation and indexed <br />depreciation. <br />Project Number Page 7 of 20 <br />Think Big. Go Beyond. www.ae2s.com <br /> <br />