Re: An Empirical Nonlinear Filter



Fred Marshall wrote:


Yes, one could say that failure to use capacity could cause a problem in how
operating costs are distributed. That's correct. In reality, the sewage
continues to flow downhill - out of control of anything but nature. The
actual numbers bear that out. So, that's not much of a problem.

But it could be a problem if things changed.



Since there seems to be such interest in how operating costs are handled,
let me say that we are using a formula designed by others which allocates
all operating costs based on loading. We've considered a different method
where the operating costs would be allocated: fixed costs according to
ownership of capacity and variable costs according to loading. This way the
problem you point to would be smaller than with the present method.
Presumably, the variable costs track actual use. Certainly that's the
attempt.

There are fixed costs. Extra use by one party means paying a larger
share of those fixed costs. Debt service might be a fixed cost.
Reading between the lines you seem to be saying that the plant isn't in
danger of being pushed to the limit so it won't need to be replaced
prematurely and that usage patterns don't really affect the life span of
the plant. So the life expectancy and capital costs are known and don't
really change much with time.




So, while I might be happy to have someone use more and pay more - there
remains the question of how to compensate for investment. That's because
it's in the contract. In truth this consideration is a nit if one looks at
the actual numbers (so far). However, it's an issue that's been raised
recently and I have to help sort things out. Thus, since the method for
calculating it is undefined, I was investigating methods for crunching the
numbers to come up with a reasonable method to arrive at a price for
overuse.

Why not a credit for overuse? Why not a charge for under use? It's not
at all clear in what way overuse is different than ordinary use other
than it got a mention in the contract.




The notion that capital charges are somehow a "penalty function" is valid to
raise. In this case it's not intended as a penalty function because the
assumption is that overuse will occur as a result of population growth -
which is less driven by availability of wastewater processing than by other
economic factors. It's simply intended to return/exchange investment when
appropriate.


It's never been completely clear what the problem is. Obviously if there
is a lawsuit there must be a problem. At first it seemed that the
problem had to do with the difference in cost of processing of a
fluctuating input stream versus a steady flow in. But now it seems it
may be something to do with defining ownership.


I understand your argument regarding borrowing a car. There are two
components: One is wear and tear which might well be lumped into the
operating costs which replaces parts that wear out. The other is the time
value of the investment all by itself - under the assumption that the asset
has a finite life but one that isn't affected much by use but rather by
obsolescence, temporal aging, etc. With a finite life, the asset has a
value that can be amortized per unit time. It's the latter that the overuse
charge intends to compensate for. So, yes, a car isn't a perfect analogy.

So, if I borrow capacity from you (and pay for the operation of it) that
seems a good thing for you if you aren't harmed. In fact, that's not a bad
argument for forgetting all about compensating for your investment. But, if
you're an accountant, you may point out that I'm getting a purely financial
benefit out of your investment and that you should be compensated for the
benefit that I receive. That too is a good argument.

I don't know. You haven't really explained how it is structured. If
paying off the amortized cost is part of the annual budget which is paid
for by annual load charges it doesn't sound like it is a good argument
at all. If that is how it is structured the party that is using more
capacity is already paying a greater share of the amortized cost and the
other party is already seeing a reduction in their bill.

-jim


In the end, it
depends on the environment and how the parties decide to deal with it. Thus
Jerry's experience is valuable as it deals with a very similar situation in
a manner that's quite a bit different from the way our contract reads today.

Fred

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