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The first step in establishing connection fees is the determination of the system planning criteria. This implies calculating system capacity and the number of customers that can be served by that capacity or an equivalent residential unit (ERU). Specifically, the system capacity is based on the capacity available on the system and the costs of the system divided by the capacity the infrastructure will serve or total number of equivalent residential units served during the time period, whichever one is more appropriate, to develop the cost per gallon for the system. Once the number of equivalent residential units, or capacity components for the system is determined, a component by component analysis is undertaken to determine the portion of the connection fee attributable to each component in dollars per equivalent residential unit. In this process, the existing assets must be valued. Existing assets may be valued in a number of different ways. These methods may include the following: ✓ Original Cost (OC) ✓ Original Cost Less Depreciation (OCLD) ✓ Replacement Cost New (RCN) ✓ Replacement Cost New Less Depreciation (RCNLD) Given these four different methods for valuing the assets, the selection of the valuation method certainly arises. The American Water Works Association M -1 manual notes the following concerning these various generally accepted valuation methods: "Using the OC and OCLD valuations, the SDC [connection fee] reflects the original investment in the existing capacity. The new customer "buys in" to the capacity at the OC or the net book value cost (OCLD) for the facilities and as a result pays an amount similar to what the existing customers paid for the capacity (OC) or the remaining value of the original investment (OCLD). Using the RCN and the RCNLD valuations, the SDC [connection feel reasonably reflects the cost of providing new expansion capacity to customers as if the capacity was added at the time the new customers connected to the sewer system. It may be also thought of as a valuation method to fairly compensate the existing customers for the carrying costs of the excess capacity built into the system in advance of when the new customers connect to the system. This is because, up to the point of the new customer connecting to the system, the existing customers have been financially responsible for the carrying costs of that excess capacity that is available to development."4 As a point of reference for this study, the City's connection fee analysis will use a RCNLD methodology for all assets. The RCNLD valuation method is a generally accepted connection fee methodology which allows growth (i.e. new connections) to reimburse existing customers for inflationary increases in the value of the existing system. The City's existing potable assets which were repurposed were based on the date acquired in service, the length or size of the AWWA M -1 Manual, 6`" Edition, p. 268 FOROverview of Connection Fees 6 City of Pleasanton - Recycled Water Connection Fee