Working for Clean Water An Information Program for Advisory Groups Cost-Effectiveness Analysis Instructor Guide ------- ------- This program t.ns prepared by The Pennsylvania State University Institute of State & Regional Affairs Middletown, PA 17057 Dr. Charlea A. Cole Project Director Dr. S. Drannon Buakirk, Jr. Project Co—Director Prof. Lorna Chr. Stoltzfua Editor Thvo guide was prepared by E. Drannon Buskirk, Jr. Advisory Teccn for the Project David Elkinton, State of West Virginia Steve Frishman, private citizen Michele Frame, private citizen John Hammond, private citizen Joan Jurancich, State of California Richard Hetherington, EPA Region 10 Rosemary Henderson, EPA Region 6 George Hoessel, EPA Region 3 George Meiss, EPA Region 5 Ray Pforrner, EPA Region 2 Paul Pinault, EPA Region 1 Eariene Wilson, EPA Region 7 Dan Burrows, EPA Headquertera Ben Gryctko, EPA Headquartera Robert Hardaker, EPA Headquarters Charles Kauffman, EPA Headquarters Steve Maier, EPA Headquarters EPA Project Officer Berry H. Jordan Office of Water Programs Operations Aoknow?.edgcnente Typists Jan Russ . Tess Startoni, Ann Kirach, Janie Fuller Student Assistants Fran Costanzi, Kathy DeBatt, Michael Lapsno, Mike Matilda Terry Switzer Graphics support was provided by the Office of Public Awareness, Environmental Protection Agency. This information program was financed with federal funds from the (1.5. Environmental Protection Agency under Cooperative Agreement No. CT900980 01. The information program has been reviewed by the Environmental Protection Agency and approved for publication. Approval does not signify that the contents necessarily refl ct the views and policies of the Environ- mental Protection Agency, nor does mention of trade names or commercial products constitute endorsement of recommendation for use. This project is dedicated to the memory of Susan A. Cole. ------- Cost-Effectiveness Analysis The Federal Water Pollution Control Act Amendments of 1972, Public Law 92-500, is a landmark piece of environmental legislation. In addition to setting a national goal of zero pollution discharge, it provides the basis for managing the nation's water quality. The U.S. Environmental Protection Agency (EPA) has established rules and regulations to carry out the provisions of the Act, including the use of cost-effectiveness analysis in the facility planning process. Cost-effectiveness analysis permits the selection of a plan from among alternative proposals. It is an attempt to integrate all important considerations early in the planning process. Upon the completion of this session the participant should: • Know the scope of cost-effectiveness analysis • Be familiar with the assessment procedures • Understand the role of citizens in analysis of the alternatives. Required Materials DSet of slides and cassette tape for the audiovisual presentation, "Cost-Effectiveness Analysis"' DSlide projector, cassette-tape player, and screen DSet of transparencies with overhead projector and chalkboard or flip chart with easel for guided discussion DCopy of the handbook "Cost-Effectiveness Analysis" for each participant DCopy of the handouts for each participant. They include: Problem Background (1 page), Selected Nonmonetary Effects (1 page), Discount Tables (2 pages), and Cost-Effectiveness Analysis Accounts Sheet, Present Worth Analysis (3 pages) DElectronic calculators (optional). ------- Important Notes 1. Several instructional options exist. The instructor may: a. Show the slide—tape program without 8ubstantive discussion b. The audiovisual presentation may precede a problem exercise c. The audiovisual presentation and the problem exercise may be covered together . In this arrangement, the slide—tape program is stopped several times at musical interludes. At these intervals, various aspects of the exercise are discussed. The arrangement of alternating the slide—tape program and the exercise should reinforce the cost—effectiveness analysis principles. 2. In preparing for the presentation, preview the slide—tape script. This program features a case study. Principles of cost— effectiveness analysis are not introduced until relatively late in the program. 3. Charts are used to facilitate discussion. It may be necessary for the instructor or an assistant to prepare these charts prior to the presentation. The contents for the charts are listed in the Appendix. 4. Charts made by the instructor should contain only information that is essential to the discussion. Charts with many words or numbers are difficult to read. However, transparencies of numerical tables may be needed for discussion of the present worth analysis. 5. Small electronic calculators can greatly speed up the computations. 6. Do not hand out the answers to the problem exercise (i.e., present worth analysis answer sheets) until the end of the session. These answer sheets are separate from the background information and worksheets. 7. Some persons have an aversion to economics or mathematics. In dealing with these problems, the instructor must be able to present the material with minimum technical jargon, and maximum practical experiences and anecdotes. 8. Encourage the participants to t,ake notes on the discussion. Worksheets are provided. Note—taking will reinforce the learning experience. 2 ------- Suggested Activities Introductory Comments . . . 5 minutes Audiovisual Presentation . . 16 minutes Guided Discussion 34 minutes Closing Remarks 5 minutes TOTAL TIME 60 minutes Introductory Comments (5 minutes) 1. Give a little history of the use of cost—effectiveness analysis in water quality planning. Mention the impetus of Public Law 92—500 and The Clean Water Act amendments of 1977. 2. Discuss briefly the procedure’s role, advantages, and dis- advantages (e.g., bias towards quantified monetary costs). 3. Caution the participants that they are advisors rahter than analysts who will perform the studies. The analysis can involve very technical considerations. The objective of this session is to get the participants familiar enough with cost—effectivenss to provide meaningful advice, rather than to develop technical competence. Audiovisual Presentation - Guided Discussion (50 minutes) Note: The A/v presentation may be played in its entirety after See item 6 which discussion of the first five items OR used step—wise at approp— follows. nate points throughout. 1. Discuss the scope of cost—effectiveness analysis. The EPA Use chart 1 on has published guidelines (Federal Register, vol. 43, No. 188. Elements of Cost— September 27, 1978) for comparing wastewater management alterna— Effectiveness tives. The topics include effectiveness in meeting goals, Analysis. monetary costs, financial costs, environmental effects, social and economic effects, technical reliability, implementation feasibility, and public acceptance. 2. In the detailed cost—effectiveness evluation, additional considerations and procedures must be taken into account. They are: • Total present worth calculations for monetary costs — a pro- cedure for estimating costs to a point—in—time • Flow reduction approaches such as water conservation programs (watersaving devices, pricing policies, regulations, and public education) 3 ------- • Staging of collection and treatment facilities. Use chart 2 on 3. The formation of a facilities plan is not limited to these Wastewater Manage— topics for cost—effectiveness analysis. Other considerations ment Options. are required by the law and EPA regulations in developing alt natives. They include considerations of: • Treatment and discharge of the effluent by conventional methods • Innovative and alternative systems, especially land treatmei and wastewater reuse. Cost—effectiveness analysis provides an opportunity to see th all of these considerations have been included in the plannin effort. Use chart 3 on 4. The participant may question where all these considerationE Water Quality fit into the planning process. Cost—effectiveness analysis Planning, primarily involves the latter steps of the process in which the alternatives are formed, evaluated , and displayed for the selection of a plan. 5. Much information has been introduced. Briefly recap the main points , as: Cost—effectiveness analysis is a procedure for comparing alternatives. Monetary costs and nonmonetary factors such as environmental effects and implementation feasibility provide the basis for the evaluation. Ask the participants to keep these points in mind as the case study and exercise are covered. Script is in 6. Start the slide—tape program, “Cost—Effectiveness Analysis Appendix. It documents the case study featured in the citizen handbook. At this point either show the audiovisual without interruptio . OR stop it at intervals to discuss the cost—effectiveness problem. The musical intervals in the presentation provide appropriate starting and stopping points. 7. The d’evelopment and preliminary screening of alternatives are not a central focus of cost—effectiveness analysis. However, they are important because data is gathered, and assumptions are made at this phase which establish the boundaries for the analysis. 4 ------- 8. Briefly explore the roles that advisory groups have in this Important! part of the planning process, such as: • Identifying problems and need areas sHaving knowledge of local values ‘Questioning analysis assumptions and procedures Pointing out innovative and alternative technologies, and multiple use options. 9. Restart the audiovisual presentation if using the second instructional approach. Stop the tape at the next musical interval. 10. The evaluation of monetary costs is quite important in cost—effectiveness analysis. Discuss the types of monetary costs that should be included in an analysis, for example: capital, mitigation, opportunity, operations and management (0&M) and replacement costs. Which ones are apparently missing in the problem exercise? Opportunity costs associated with a lost recreation site. 11. Present worth analysis is used to put all monetary costs on a comparative basis by discounting future costs back to the present. This procedure works like the interest rate computa- tion in reverse. Briefly discuss what is needed for a present worth analysis, such as: ‘Disaggregated costs and benefits such as revenues from the sale of waste nutrients S Facility life span •Water Resource Council interest and discount rate ‘Estimated salvage value of the facilities at end of the project period. 12. Pass out the handout materials to the participants. Tell Use handouts on them to look over the background for the cost—effectiveness Problem Background, problem. At this point do not pass out the answer sheets to and Discount Tables. the present worth analysis problem. 5 ------- 13. Costs and revenues presented on the problem background handout have to be calculated for each year for each alter- native. These separate discounted costs and revenues are ther aggregated into the following equation which gives the total present worth (PW) of different alternatives: Use chart 4 on Total PW = initial capital costs + PW of future costs — Present Worth PW of revenues and salvage. Analysis. Go through one or two sample present worth calculations in thE problem exercise. Have the participants follow along with tI worksheets and discount tables. Simple, straightforward calculations are suggested. These calculations should demons- trate the use of the discount tables. Sample calculations cc include upgrading costs and O&M costs. Use handout on Hand out the answer sheets to the present worth analysis probi Present Worth Analysis. Important. ’ Based upon this limited exercise, discuss how cost—effectiver calculations can go wrong. • Use of improper table discount rate and life span • Costs of monetary benefits attributed to wrong years • Inaccurate assessment of the magnitude of Impacts • Avoidance of some costs such as opportunity costs • Mechanical computation errors. 14. Mention the role of advisory groups in evaluating moneta costs, such as identifying costs and benefits, and checking assumptions and procedures of the analysis. 15. Start the audiovisual presentation again if using the second approach. Stop the tape at the next musical interval. (fee chart 5 on Non- 16. Nonmonetary effects are another important area in evaluat monetary Factors. wastewater management alternatives. These additional factors include: • Environmental effects, including economic and social considerations • Resource use and energy consumption • Reliability and feasibility • Implementation capability 6 ------- • Public acceptability. 17. Not only are these considerations difficult to compare quantitatively, but they are also very complex. Refer parti- cipants to a list of approximately 30 environmental factors given in the citizen handbook. Discuss briefly the nonmonetary impacts of the problem exercise, Use handout on Non— including: monetary Effects. • Aquatic enrichment, possibly eutrophication • Decreased stream diversity ‘Aesthetic losses and recreational losses • Land owners inconvenienced by sewer construction, traffic disruption, and noise • Flexibility of staged—growth alternative ‘Temporary loss of wildlife habitat along sewer. 18. If using the second instructional option, start the slide— tape program again and play it until the end. 19. The last step in cost—effectiveness analysis is the display of all information for the comparative evaluation of alterna- tives. An accounts sheet is often the best way to organize the diverse categories of information. Using the handout provided, set up a display of all the Use handout on Cost- information for cost—effectiveness analysis of the alternatives Effectiveness given in the problem exercise. Analysis Accounts Sheet. Please note that this analysis is abbreviated and incomplete, and is used only for illustrative purposes. 20. Advisory groups can assist in this last part of the analysis procedure. They can: • Assist in identifying tradeoffs, especially the composite Important! effects of alternatives ‘Evaluate all factors together. ------- Closing Remarks (5 minutes) 1. Briefly reiterate the main points about cost—effectiveness analysis that were discussed at the end of the citizen handbook. They are: ‘Cost—effectiveness analysis permits the systematic com- parison of wastewater management alternatives. The costs of achieving comparable goals using different alternatives are compared. ‘It should result in an integrated documentation of both monetary and nonmonetary factors — a display that clearly shows the tradeoffs among the alternatives. ‘The main components of cost—effectiveness analysis are monetary costs, noninonetary factors such as environment and social costs, and implementation considerations such as system reliability. ‘Cost—effectiveness analysis is part of a five—step planning sequence. It is most useful in the latter steps of the process — the evaluation of alternatives, and the selection of a plan. Costs and benefits of several alternatives are compared at the same point in time through present worth analysis. ‘Advisory groups can give valuable assistance at several places in analysis process. 2. Answer any remaining questions. 8 ------- Selected Resources Guidance for Preparing a Facility Plan . EPA—430/9—76—015. Washington, DC: Office of Water Program Operations, Municipal Construction Division, U.S. Environmental Protection Agency, May 1975. 32 pp. with references and appendices. Order No. MCD-46. This publication briefly discusses the facility planning process. Featured are the considerations at each planning step such as cost—effectiveness analysis, the format of plans, and the relation- ship of facility plans to other water quality management and planning programs. More detailed instructions are given in the January 1974 version of the same document. This document is available from the General Services Administration, Centralized Mailing List Service, Building 41, Denver Federal Center, Denver, CO 80225. Give the order number and the document title when placing orders. University of Wisconsin—Extension, Department of Engineering and Applied Science. Facility Planning for Wastewater Treatment Works . FP2O1 Second Series, seminar — workshop manual, “Cost—Effectiveness Analysis” workshop. Atlanta, GA: Region IV, U.S.Environinental Protection Agency, November 28 — December 1, 1978. pp. Bi—BlO and El—El3. This manual is used during an intensive four—day series of seminars and workshops on current issues in facility planning. Topics include: cost—effectiveness analysis, innovative and alternative systems; noninonetary assessment; statutory and regulatory requisites; EPA policy on the review of waste treatment alternatives; small and Individual systems; project management; public participation; land treatment, pretreatment; sludge disposal; sewer system evaluation; plan development. Order from Professor John Quigley, University of Wisconsin—Extension, 432 North Lake Street, Madison, WI 53706. 9 ------- Schmidt, C.J. and D.E. Ross. Cost—Effectiveness Analysis of Municipal Wastewater Reuse . WPD—4—76—Ol. Washington, DC: Water Planning Division, U.S. Environmental Protection Agency, April 1975 116 pp. with 5 appendices. This book pertains specifically to alternatives which reuse wastewater, but it contains a chapter on cost— effectiveness analysis. This section gives the basic procedures for the technique, the EPA cost—effectiveness guidelines, and formats for present worth calculations. This document is available from Library Services, U.S. Environmental Protection Agency, Research Triangle Park, NC 27711. Conclusions Wastewater Management Study of the Central Pennypack . Publication Number 53. Harrisburg, PA: Bureau of Water Quality Management, Department of Environmental Resources, November 1977. 78 pp. The analysis of three wastewater management alternatives is summarized. The key issues, the cost—effectiveness evaluation, and an implementation schedule are given. Appendices make up over half of the document, and contain consultant reports, letters, and cost calcu- lations. The position and rationale of the Department of Environmental Resources are featured. Copies are available free (as long as they last) from the Pennsylvania Department of Environmental Resources, Bureau of Water Quality Management, Division of Water Quality, P.O. Box 263, Harrisburg, PA 17120 Construction Grants Program. Municipal Wastewater Treatment Works. Appendix A: Cost—Effectiveness Analysis. Federal Register . Vol. 43, No. 188. September 27, 1978. Copies of the Federal Register can be obtained through local libraries. 10 ------- Appendix A. Contents of charts for use by the instructor in the suggested activities. These pages may be used to make transparencies, or the contents may be copied onto flip charts. 1. Elements of Cost—Effectiveness Analysis 2. Wastewater Management 3. Water Quality Planning 4. Present Worth Analysis 5. Nonmonetary Factors B. Handouts for use by the instructor in the guided discussion. Copies will need to be made for each participant. 1. Problem Background 2. Discount Tables (2 pages) 3. Present Worth Analysis (3 pages) 4. Selected Nonmonetary Effects 5. Cost—Effectiveness Analysis Accounts Sheet C. Copy of the script for the slide—tape program, “Cost Effectiveness Analysis. t ’ 1 ------- Elements of Cost-Effectiveness Analysis Goal effectiveness Environmental effects Monetary costs System reliability Economic costs Implementation feasibility Social costs Public acceptance ------- Wastewater Management Conventional treatment and disposal Alternative and innovative systems ------- Water Quality Planning 1. Determine problems 2. Define solution objectives 3. Develop alternatives 4. Evaluate options 5. Select plan ------- Present Worth Analysis Total Initial PW of PW of Present = Capital + Future — Revenues Worth (PW) Costs Costs L’I ------- C .’ Nonmonetary Factors Environmental effects Resource use Reliability and flexibility Implementation capability Public acceptability ------- Problem Background In the screeningprocess, the wastewater management options have been narrowed down to two alternatives with the same total treatment capacity and the same quality of effluent. However, they differ as to costs, salvage values, construction stages, and nonmonetary aspects. Both alternatives are conventional treatment systems, consisting of a secondary activated sludge process and gravity sewers. Unfortunately, the site for the treatment plant is a wooded area that is presently used as a boy scout camp. A shallow, slow—moving stream is to receive the effluent. Mnetary Costs Alternative A Alternative B Capacity (million gallons per day) 10 mgd 10 mgd Linear flow increase 2 to 10 mgd 2 to 10 mgd over 20 years Planning period (years) 20 20 Initial plant cost $3,000,000 $2,000,000 (@ 5 mgd) Salvage value at end $0 $750,000 of 20 years Upgrading cost at $0 $1,500,000 year 10 to 10 mgd Constant annual $126,000 $84,000 o & M cost, years 1 to 10 years 11 to 20 $126,000 $165,000 Variable annual $0 to 20,000 o & M cost, years 1 to 10 linear increase $0 to 68,000 over 20 years years 11 to 20 $0 to 29,000 linear increase Interest rate 7% 770 Mitigation costs Capital — year 1 $113,000 $65,000 year 10 $0 88,000 17 ------- (D (0 I- , ‘. “1-’ (0 U) I- .. (1(9 ) - 7 o 0 ,. I- .. I- ’. 13 006) 6) rt L i i 10 6)9) o ocr CD ( ( ‘(0 U, 03 00 I- ’ . 0 13 00 0 ‘ - 4 (1 (9 I — . 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II) ‘1.31 1,177 IL (1 ’ .I ’i7 ”I’I 11 1331061)) 30 31 1 )2 3:s 34 15 76183113 13 1 )200 85,10 14 (12.404.11’) 14 2302 2 (161 14 3u814114 13 058073)11 13 200(1.1103 13 .1331)2025 13 46’Jo 8850 13 87900892 12 40’ 01118 22 51(8 3010 12 1,41,8 65.42 12 75.17(1002 12 55800(136 1) 810(8627 ‘1 31)1,19 3 ”4U 12 015,4 7737 12 10712090 12 (112 ) 14970 I I 9177)1.11) II .31 ’ ll 19 I I 441’! 11)11 29 1)35)0337 11 33u93,IoT 35 . ‘ 1i, 17 :14 39 14 4042’lfl10 14 1.21.138711 II 7)672.11.11 14 8 ,0 1)6 (4 ( 1130741)8 1305(103073 13 70051, ) 170 12 8)1785)107 1.1 07112 1021 14 0(1408011 12 0 )71,7234) 12 ‘(‘.2 117714 11 1171) 11,11) 1.) 111.117(45 1.) 21,402041) Il 27231111 12 ‘111)52214 12 4)3(093! 12 ‘ )7’ 14 1(31. 12 53868 ’JJl 11 1,3451)022 11 7(71 ‘3.172 I I 7751 71’51 11 ) 12SS 11 871.58240 40 11 4! 4, 44 1504670557 15 (3.80 1502 15 ‘2215, ‘3432 15 3u01 7294 15 ‘38418202 11 14552557 14 .12!) t ’lvO 31 11121 1J ) I I I 14 .1588.1705 14 42144227 133)170cM 13 4111 2011 11 1321 48’)3 1’) 5460 0(07 13 237u0810 123)14401.06 12 01300)53 12 61139 1772 12 7(55 28)1 1 ’2 78002613 1(0211113)) II 0572 1)37 32 (1)10), ¶“. ..7 12 0.1.12 (“SI 12 077U7l ! 45 4,1 47 48 41) 50 15.181193200 96 (213691)0 I I, 5,5902821 15 (.5(10 ‘loOt 16.7075 7227 1576180004 14 4S0 ’22S 12 14 535-) 2375 14 587’ ! 5,462 14 (131.’) l ’ 146 14 6210 1151 14 72452067 III 60552150 1.1 1,30020(8 13 01)1 ( 1 070-1 I I 75047143 13 34079833 13.80074029 12 8190 2868 (2 8345.1143 (2 8 ( 47 642 87 1’2 1) 190 101)2 12 0470 2244 112 9748 1157 12 10310130 3? 1374 9’.’.t( 12 1(712 (‘I’ll 12 98’)) lii’) 12 2)21 ( III ) 126111811,1 ------- DISCOUNT TABLES (coNTINuED) Present Value of Gradient Series n 7% 8% 10% 12% 15% 20% n 1 2 3 4 5 0.0000 0.8734 2.5060 4.7941 7.6467 0.0000 0.8573 2.4450 4 6501 7.3724 0.0000 0.8264 2.3291 4.3781 6.8618 0.0000 0. 72 2.2203 4.1273 6.3970 0.0000 0.7S61 2.0712 3.7864 5.7751 0.0000 0.6944 1.8519 3.’986 4.9061 1 2 .3 4 5 6 7 8 9 10 10.9784 14.7149 18.7889 23.1404 27.7156 10.5233 14.0242 17.8061 21.808! 25.9768 9.6842 12.7611 16.0287 19.4215 22.8913 8.9302 11.6443 14.4715 17.3563 20.254I 7.9368 10.1924 12.4807 14.1548 16.9795 6.S806 8.2551 9.8831 11.4335 12.8871 6 7 8 9 10 11 12 13 14 15 16 11 18 19 20 32.4665 37.3506 42.3302 47.3718 52.4461 57.5271 62.5923 67.6220 72.5991 77.5091 30.2657 34.6339 39.0463 43.4723 47.8857 52.2640 56.5883 60.8426 65.0134 69.0898 26.3963 29.9012 33.3772 36.8005 40.15211 43.4164 46.5820 49.6396 52.5827 55.4069 23.1289 25.9523 28.7024 31 .3624 33.9202 36.1670 38.6973 40.9080 42.9979 44.9676 19.l289 21.1849 23.1352 24.9725 26.6930 28.2960 29.7828 31.1565 32.4213 33.5822 14.2330 15.4667 I6.5883 17.6008 18.5095 19.3208 20.0419 20.6805 21.2439 21.7395 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 82.3393 87.0793 91.7201 96.2545 100.6765 73.0629 76.9257 80.6726 84.2997 87.8041 58.1095 60.6893 63.1462 65.4813 67.6964 46.8188 48.5543 50.1776 51.6929 53.1047 34.6443 35.6150 36.4988 37.3023 38.0314 22.1742 22.5546 22.8867 23.1760 23.4276 21 22 23 24 25 30 35 40 45 50 120.9718 138.1353 152.2928 163.7559 172.9051 103.4558 116.0920 126.0422 131.7331 139.5928 77.0766 83.9872 88.9526 92.4545 94.8889 58.7821 62.6052 65.1159 66.7J43 67.7625 40.7526 42 3587 43.2830 43 8051 44.0958 24. 678 24.6614 24.8469 24.9316 24.9698 30 35 40 45 50 Source Grant, Eugene L., W. Grant Ireson, Richard S. Leavenworth. Prir Engineering Economy . Sixth Edition., New York, NY: The Ronal Company, 1972. pp. 606—607. ------- Present Worth Analysis Alternative A Step 1 Initial cost = $3,000,000 Step 2 To find the present worth of operating costs, it will be necessary to calculate separately the present worth of the constant costs and the variable costs. a. Present worth of constant annual costs equals that cost times the uniform series present worth factor @ 7.0% for 20 years. Thus: $126,000 (10.5940) = $1,335,000 b. Present worth of a variable cost increasing linearly is found by first finding the amount of increase per year. This amount is $68,000/20 years or $3,400 per year. This increase is known as a gradient series. This series times the correct gradient series present worth factor @ 7.0% for 20 years yields the present worth of the variable cost. Thus: $3,400 (77.5091) = $ 264,000 Step 3 Mitigation costs are at the base year. No discounting is necessary. $ 113,000 Step 4 Sum of numbers obtained in the steps above yields present worth: initial cost = $3,000,000 present worth of constant 0&M costs = 1,335,000 present worth of variable 0&M costs = 264,000 present worth of mitigation costs = 113,000 total present worth $4,712,000 ------- Present Worth Analysis (continued) Step 5 As before, the present worth just derived times the capital recovery factor @ 7.0% for 20 years will yield the average annual equivalent cost. Thus: $4,712,000 (.9439)= $ 444,800 which is the average annual equivalent cost of the plant for 20 years. Alternative B Step 1 initial cost $2,000,000 Step 2 Calculate the present worth of the 0&M costs as follows: a. Present worth of constant annual cost years 1—10 equals given cost times uniform series present worth factors @ 7.0% for 10 years. Thus: $84,000 (7.024)= $ 590,000 b. Present worth of the variable 0&M costs years 1—10 equals the gradient series ($2,900) times the present worth factor of a gradient series @ 7.0% for 10 years. Thus: $2,900 (27.7l56)= $ 80,400 c. The present worth of the constant 0&M costs year 11—20 are first calculated as in (a) above using the given cost for years 11—20. This, however, yields present worth in year 11 which must be converted to present worth in year 1. This is accomplished by multiplying the present worth (year 11) times the single paymr present worth factor @ 7.0% for 10 years (.5083). Thus, pr worth in year 1 equals: $165,000 (7.024) (.5083)= $ 589,100 d. The present worth of the variable 0&M costs years calculated as in (b) above using the gradient Se ’ 11—20 which is $2,900. This yields the presen t which again must be converted to present wor multiplying the present worth (year 11) tir present worth factor @ 7.0% for 10 years $2,000 (27.7156) (.5083)= ------- Present Worth Analysis (continued) Step 3 To determine the present worth of the upgrade cost which occurs at year 10, multiply the upgrade cost times the single payment present worth factors @ 7.0% for 10 years. Thus: $1,500,000 (.5083)= $ 763L000 Step 4 The present worth of the salvage value at the end of 20 years equals that value times the single payment present worth factor @ 7.0% for 20 years. Thus: $750,000 (.2584)= $ 194,000 Step 5 The mitigation of impacts is done in two stages; costs in year 10 must be discounted. Those in the base year are not discounted. $65,000 + ($88,000 x .5083)= $ 109,700 Step 6 The sums of the values obtained in Steps 1, 2, 3, and 5 minus the value obtained in Step 4 will equal the present worth of the plan. Thus: initial cost $2,000,000 present worth of constant 0&M year 1—10= 590,000 present worth of variable 0&M year 1—10= 80,400 present worth of constant 0&M year 11—20= 589,100 present worth of variable O&M year 11—20= 40,900 present worth of upgrade at year 10= 763,000 present worth of mitigation costs 109,700 TOTAL $4,173,100 Subtract from the total the present worth of salvage value present worth of salvage value= $ 194,000 total present worth $3,979,100 Step 7 As before, the present worth just derived times the capital inventory factor @7.07. for 20 years will yield the average annual equivalent cost. Thus: $3,979,100 (..09439)= $ 375,600 h is the average annual equivalent cost of the plant over 20 years. ------- SELECTED NONMONETARY EFFECTS 1. Construction of the sewers will cause dust, noise, traffic disruption, and other inconveniences. The total magnitude, at least initially, should be less for the staged alternative. Social and secondary impacts such as development are not considered extensively in either alternative. 2. Aesthetic and recreational losses occur as the woodland is cut for the con- struction site, and the stream undergoes eutrophication. This impact would be reduced slightly with the staged alternative. 3. A decline in diversity of aquatic organisms would also accompany the eutrophication processes and construction activities. Full recovery from the construction effects may be delayed by the staged alternative. 4. Low stream flows will not dilute the effluent sufficiently. Flow augmentation with associated mitigative costs will be necessary. Except for timing, no significant differences seem to exist between the alternatives. 5. Temporary wildlife habitat destruction will occur along the sewer routes from construction activities. Depending upon the location of the interceptors, more losses may occur with the nonstaged alternative. 6. Since the two plans for the treatment plant use the same site and same disposal methods, no opportunity costs exist. However, the location of sewers through prime farmland in one alternative, but not the other one, could generate opportunity costs. 7. The staged alternative permits more growth flexibility compared with the other option. 23 ------- COST—EFFECTIVENESS ANALYSIS /\CCOUNTS SHEET Factor Evaluation Alternative A Alternative B 1. Water Quality Goals 2. Monetary Costs A. System Outlay Costs B. Opportunity Costs 3. Financial Costs 4. Environmental Effects A. Hydrology B. Biology C. Air Quality D. Land E. Energy and Resource Use 5. Social and Economic Changes A. Land Values B. Employment C. Dislocation D. Health E. Aesthetics 6. Technical Reliability 7. Implementation Feasibility 8. Public Acceptability 24 ------- Audiovisual Script COST-EFFECTIVENESS ANALYSIS Slide Description Narrative 1. Cassette Start 2. Title: Cost—Effective Analysis Music 3. Map of Pa. with arrow Near the Southeast border of Pennsylvania is the large metropolitan area that takes in Philadelphia, Pa., Trenton, N.J., and Wilmington, Del. Within this area, a rapidly dwindling supply of open space and green areas——and the occurrence of water quality problems have in recent years been cause for much concern. 4. Closeup of map of area At the heart of one particular wastewater management controversy is an area known as the Pennypack Watershed. It seems that the area along Pennypack Creek represents the only significant remaining green belt that is adjacent to Philadelphia. And to preserve this area and to deal with pollution problems, 5. Group of people at meeting the three local municipalities and a private citizens group called the Pennypack Watershed Association got involved in an interesting was tewater management problem. (Graphic) 6. List of alternatives In the early 1970’s, several alternative wastewater management proposals had been made; including: a spray irrigation system and an interceptor or pipeline leading to an existing wastewater treatment plant in Philadelphia. Well, ——after the various alter- native proposals were made, the problem became -— (Graphic) 7. Question mark over meeting How to decide which of the alternatives was best for the area? 25 ------- (Graphic) 8. Cost—EffectIveness Analysis (Graphic) 9. Facilities planning 6—step sequence 1. Determine problems 2. Define objectives 3. Develop alternatives L4 Evaluate alternatives 5. Select plan 6. Revise plan (Graphic) 10. Same as above, except number 1. Highlighted. 11. Photo of sedimentation 12. Split scene: Flooding and dry stream beds 13. Photo of stream encroachment (Graphic) 14. Facilities planning: highlights 1. Determination of problems 2. Definition of objectives 3. Development of alternatives 4. Evaluation of alternatives 5. Plan selection 6. Revision of continued planning Cost—Effectiveness Analysis is the basis for the selection of alternatives. Cost—Effectiveness Analysis is part of a 6—step planning sequence and is most useful in the latter steps of the pro- cess — the evaluation of alternatives, and the selection of a plan. First, of course, water quality problems must be determined. Sometimes there is no present problem existing. But, water supply and wastewater treatment requirements must be considered for the future. For example, when it is projected that future wastewater treatment will exceed present capacity or if future treatment will fail to meet water quality standards, then the com- munity does have a problem. Water quality problems on the Pennypack that needed to be evaluated included: Sedimentation and debris, Flooding, Seasonally low stream flows, and Stream encroachment; developments were gradually getting closer and closer to the shoreline of the creek. If it has been determined that problems do exist, the next steps are to come up with some answers to the problems — and develop some alternative methods of dealing with the different water quality problems. 26 ------- (graphic) 15. List of alternatives Some of the alternatives might include: 1) No facility needed——perhaps the problem could be dealt with in another way; 2) the improvement of existing facilities; 3) conventional collection and treatment systems; and, 4) alternative and innovative systens. 16. Photo of advisory group At this point, in the early planning stages, Words ; advisory group input is very important. 17. Phased Development These and other considerations involve phased Energy Requirements development, energy requirements, and multiple Multiple Use Opportunities use opportunities. 18. Graphic of brainstorming session A good, old—fashioned brain—storming session is what’s needed as a means of public partici- pation. With input from all concerned citizens. Ideas, no matter how unconventional they night seem, should be discussed and considered. Other modes of public participation exist, and should be used. 19. View of Pennypack area In the Pennypack case, the following alterna- tives were explored: 20. Split screen: - spray irrigation/interceptor Of all the alternatives, the two that looked most promising were spray irrigation and an interceptor. Both of these alternatives net water quality criteria and standards. 21. Population graphic Population projections were considered —— and although they varied slightly between consultants, the difference was not enough to effect wastewater flow estimates. 22. Map of Pennypack Another consideration was one of the legality of transferring wastes from one local govern- ment authority into another. 27 ------- 23. Advisory group picture Other assumptions, considerations, alternatives——and, well ——the whole general scope of the Pennypack study included: (Graphic) 24. List —construction site availability —environmental effects —social effects —public acceptability —implementation feasibility —legality —site suitability and capacity ——and last but certainly not least—— —economic costs. MUSIC (Graphic) 25. Facilities planning Cost—Effectiveness Analysis, although used sequence: highlight throughout the planning process, Is primar- ily involved in the evaluation of alternatives. —Determination of problems —Definition of objectives For each alternative various costs have to —Development of alternatives be determined. There are both monetary and — Evaluation of alternatives nonmonetary costs. 26. Monetary Costs: Monetary Costs examples might include present and future capital costs, operation, —present and future capital costs maintenance and replacement costs, opportunity —operation, maintenance and costs such as the loss of potential income replacement costs or resources , and mitigation costs. —opportunity costs —mitigation costs (Graphic) 27. PRESENT WORTH ANALYSIS Since amounts of money and timing of money outlays will vary among alternatives, it is necessary to express them on a coimnon basis ——and at the same point in time. Present worth analysis has been developed for making such cost comparisons. 28 ------- What information is needed to make a present worth analysis? Bow is the calculation done? (Graphic) 28. Present Worth $ x (1 + r)t The present worth of future costs and benefits Discounting / \ are estimated by a discounting procedure I which, in essence, is the reverse of interest Cost Interest Year calculations. Hence, the discounting equation Di as shown, is merely the opposite of the P . interest calculation equation. In both ate instances, the only information needed is the cost, the interest or discount rate, and the year in which the cost occurs. (Graphic) 29. Total = Initial Capital Such costs are calculated on a year—by— Worth (PW) Costs year basis, and are aggregated to give the total present worth of each alternative. + PW of Future Costs PW of Revenues & Salvage Values (Graphic) 30. Same as above with present If all costs, monetary and nonmonetary, are worth highlighted similar and treatment efficiencies are comparable, the project with the LOWEST PRESENT WORTH must be selected to qualify for federal cost—sharing grants. Music 31. ?hoto Ducks - 32. Photo decaying wood In the case of the Pennypack, the consultants did not agree on monetary costs. As resolved by DER, the following cost estinates were made: 29 ------- 33. Bar graph The spray irrigation alternative had Capital, operating and higher capital, operation and management, management costs and replacement costs: About 1/3 higher, than the interceptor option. 34. Bar graph Mitigation Costs Both alternatives would have adverse effects on stream flows — the costs for lessening these adverse effects are called mitigation costs, and they would be about 3 times higher for the interceptor. 35. Advisory group meeting photo Situations that will need mitigation are commonly overlooked and advisory groups can be of special assistance in identify- ing such possible costs and pointing them out to the agency or consultant. (Graphic) 36. List of costs In the Pennypack case, it turned out that the interceptor, at first, appeared slightly less expensive than the spray irrigation but that was without consideration of the 9 million dollar opportunity cost (Graphic) 37. Same as above with opportunity that should be charged against the inter— cost highlighted ceptor alternative. Overall, spray irriga- tion was more cost—effective. 38. Photos split screen Other factors, such as energy use, reliability and flexibility, and environmental impacts House and field/geese by must be included in the cost—effectiveness stream analysis. Music 30 ------- (Graphic) 39. Nonmonetary evaluation If economic costs were all that mattered, the alternative with lowest present worth would be chosen; however, nonxnonetary factors are just as important. (Graphic) 40. List These factors are: —environmental effects (including social impacts) —reliability and flexibility —implementation capability —resource use and energy consumption, and, —public acceptance (Graphic) 41. Same as above but with The environmental assessment is done environmental highlighted concurrently with other studies in the facilities planning process. (Photo split screen) 42. Stream bottom sampling & An inventory of environmental conditions groundwater sampling should be compiled. It will provide a base against which predicted environmental changes may be evaluated——sampling stream bottom organisms, and taking groundwater samples are examples of evaluation techniques that can be included in the inventory. (Graphic) 43. Direct and indirect effects Both direct and indirect environmental effects may be revealed in the analysis. 44. Picture of treatment plant Direct effects relate directly to the location, construction and operation of the project. Examples of direct beneficial effects include recharged groundwaters from land treatment. 45. Photo of sewer overflow Negative effects may include erosion along sewer lines, overflows from sewer manholes, odors, loss of open space, noise, and air pollution from incinerated sludge. 31 ------- (Graphic) 46. With indirect highlighted Indirect effects are the indirect changes that are induced by a project. PHOTO: 47. development near stream These include changes in population, economic growth, and land use such as development around sewer interceptors. Split screen: 48. spray/interceptor photo In the Pennypack example, regarding environ- mental effects, spray irrigation was much more advantageous compared to the interceptor alternative. 49. Stream photo Spray irrigation would increase streainf low, while the interceptor would reduce streamf low. Spray irrigation would permit more kinds of aquatic organisms to live. 50. Photo of deer Spray would stimulate less development, thus disturbing fewer wildlife habitats, and 51. Photo of spray system would require less use of treatment chemicals, but much greater commitments of land and energy resources. 52. Photo of Park area Spray would make feasible open spaces and a wilderness park. PHOTO: 53. Advisory group meeting with It is not enough for an advisory group to different advantages and simply identify the advantages or disadvan— disadvantages tages of various alternatives because if the project is to succeed in the long run, it must be acceptable to the people. 54. News headlines The advisory group should assist in developing a public participation program such as informational meetings and media publicity that reaches all elements in the community. 55. Field photo: Stream 56. Wildlife photo: Bird 57. Wildlife photo: Deer 32 ------- Music (Graphic) 58. Plan selection The selection of the alternative plan that is best suited to a community’s water quality goals is the main purpose of facilities planning, 59. Cost—effectiveness analysis and cost—effectiveness analysis provides the basis for this decision. 60. Sample of accounts sheet All significant costs and effects of each alternative must be clearly displayed. Costs and effects can be displayed in various formats, although an approach suggested by EPA is an accounts sheet. 61. Pennypack accounts matrix As shown by the matrix for the Pennypack, these accounts can be quite lengthy. It is not always easy to see relationships among the various items. Photos: 62. Woman at meeting But individuals do not have to deal with these costs and effects alone , that’s why there is an advisory group , to help each other. 63. Advisory group photos . . . to, as a group, assist in identifying tradeoffs, especially the composite effects 64. of alternatives ——and to evaluate all factors together. 65. 66. 67. 68. 69. Pennypack acknowledgement Credit slide 70. Produced by The Pennsylvania Credit slide State University, The Capitol Campus, under a grant provided by U.S. Environemental Protection Agency END •0 S VESflMfl t PSIUTtNC OPPtCS 1980 34 1—0821113 33 ------- Working for Clean Water is a program designed to help advisory groups improve decision making in water quality planning. It atms at helping people focus on essential issues and questions, by providing trained instructors and materials suitable for persons with non—technical backgrounds. These materials include a citizen handbook on important principles and considerations about topics in water quality planning, an audiovisual presentation , and in- structor guide for elaborating points, providing additional infor- mation, and engaging in problem—solving exercises. This program consists of 18 informational units on various aspects of water quality planning: Role of Advisory Groups Innovative and Alternative Technologies Public Participation Industrial Pretreatment Nonpoint Source Pollution: Agriculture, Forestry, and Land treatment Mining Water Conservation and Urban Stormwater Runoff Reuse Groundwater Contamination Multiple Use Facility Planning in the Environmental Assessment Construction Grants Program Cost—Effectiveness Analysis Municipal Wastewater Processes: Overview Aastewa er Facilities Operation and Maintenance Municipal Wastewater Processes: Details Financial Management Small Systems The units are not designad to make technical experts out of citizens and local officials, Each unit contains essential facts, key ques- tions, advice on how to deal with the issues, and clearly—written technical backgrounds. In short, each unit provides the information that citizen advisors need to better fulfill their role. This program is available through public participation coordinators at the regional offices of the United States Environmental Protection Agency. ------- |