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DUBLIN SAN RAMON SERVICE DISTRICT REGIONAL CONNECTION FEES 3. Value of Service. System development charges are based on non direct cost based considerations such as the fees that other area utilities charge, estimated opportunity or substitute costs, et al. Unlike the system buy -in or incremental cost pricing methods, this method does not require extensive analyses in valuation and cost determination. Revenues derived from system development charges are commonly used to offset part or all capital costs to accomplish any of the following objectives: 1. To pay the capital costs of future capacity provided for growth. 2. To provide rate relief to existing system users by recovering that portion of the annual existing and future capacity capital costs associated with growth, including debt service requirements and direct asset purchases from current revenues. 3. To accumulate reserves to finance system improvements and expansions required to meet growth needs. Since the system buy -in method for developing system development charges requires the selection of a basis for determining plant value, a discussion of asset valuation methods follows. Asset Valuation Methods Various methods are employed to estimate the value of utility facilities required to furnish service to new users. The two principal methods commonly used to value a utility's properties are original cost and reproduction cost. Original Cost The principal advantages of the original cost method lie in its relative simplicity and stability, since the recorded costs of tangible property are held constant. The major criticism levied against original cost valuation pertains to the disregard of changes in the value of money over, which are attributable to inflation and other factors. As evidenced by history, prices have tended to increase rather than to remain constant. Because the value of money varies inversely with changes in price, monetary values in most recent years have exhibited a definite decline; a fact not recognized by the original cost approach. This situation causes further problems when it is realized that most utility systems are developed over time on a piecemeal basis as demanded by service area growth. Consequently, each property addition was paid for with dollars of different purchasing power. When these outlays are added together to obtain a plant value the result can be seriously misleading. Reproduction Cost Changes in the value of the dollar over time, at least as considered by the impact of inflation, can be recognized by reproduction cost property valuation. The reproduction cost represents the cost of duplicating the existing utility facilities at current prices. Unlike the original cost approach, the reproduction cost method recognizes price level changes that may have occurred since plant construction. The most accurate reproduction cost valuation would involve a physical inventory and appraisal of plant components in terms of their reproduction costs at the time of valuation. However, with original cost records available, a reasonable approximation of reproduction cost plant value can most easily be ascertained by trending historical original costs. This approach employs the use of applicable cost indices BLACK VEATCH 4 MAY 2010