Economic Life Factors

This section discusses the economic factors considered when determining the SEL.

The economic life of an asset is determined by the asset’s productive age, capacity or value provided before it requires replacement, refurbishment or abandonment. The economic life factors that should be considered include:

• Supply constraints
• Demand factors
• Technological redundancy
• Legislative and environmental changes
• Operational costs and practices.

Supply Constraints

Some infrastructure is highly impacted by demand considerations. For example, natural gas is a natural resource with a finite life. Depletion of gas resources may make the pipes transporting the gas redundant.

The future redundancy of a pipe may be estimated to occur prior to the expiration of the technical life of the pipe. In such cases the remaining life of the pipe may be reduced to reflect the fact that the pipe will only be used up to the time when the gas resource is depleted. Dramatic changes in demand can also cause supply redundancy; for example, the shutting down of major industrial plants in a specific area may make specialized treatment capabilities technically irrelevant. This impact is reviewed in detail in the following section.

If a asset is determined to be redundant because of supply constraints, consideration should be given to the “downstream” effect where other network assets may also become redundant over the same period.

Demand Factors

The demand for service by customers can potentially affect the usage of the assets, thereby affecting the asset lives through:

Decreasing Demand

The customers’ changing requirements for wastewater treatment infrastructure could reduce to such an extent that existing assets become partially or wholly redundant based on the capacity pipes are able to carry. This can be due to factors such as:

• Customers switching to an alternative technology
• Customers moving from areas supported by the infrastructure
• Assets being constructed for a higher forecast demand that is not realized in the future (which is covered in the optimization process)
• Customers bypassing the incumbent network to reach competitors.

Increasing Demand

More likely in many places is an increasing demand for service over time so that the existing assets will not be able to meet the customer requirements. If that asset is a pipe, for example, and provided that the replacement of the existing pipe with a larger pipe is already included in the corporate organization plan, the economic life of the existing pipe is limited to the expected time of replacement.

These are factors that individual organizations need to address and recognize based on local situations.

Technological Redundancy

Network assets may become redundant as new technology is introduced that replaces the assets or reduces the period that the assets are required to stay in operation before new technology is implemented.

Note that the effect of new technology should be considered as an economic factor only if the utility has a formal replacement program for the technologically redundant assets.

Legislative and Environmental Changes

Legislative or environmental changes may result in changes to operational practices that may need to be reflected in the determination of asset lives.

Changes may directly relate to an asset. For example, all water meters may have to be of a certain standard by a certain date thereby requiring replacement of existing assets. Changes may indirectly relate to assets - for example, conservation-based building code requirements that drive down the average consumption of water per household.

Operational Costs and Practices

A typical life cycle for an asset will have greater repairs and maintenance cost as the asset ages. Therefore the asset may still be operational but the cost of keeping it in operation may be higher than the cost of replacement. The asset will have reached its economic life prior to the technical life since the organization will seek to replace the asset to realize efficiencies of operation.

To support an earlier replacement period than the technical life, a benefit-cost-benefit analysis will be required that demonstrates whether the replacement is justified prior to reaching the technical life.

Examples of reasons for justification are:

• The existing asset can be shown to be uneconomic to retain in operation due to maintenance costs thus making the replacement of the asset economical.
• Service losses are excessive and asset replacement will be beneficial.
• Safety considerations result in replacement prior to the technical life being reached.

For the replacement to be justified on an economic basis, generally, the outward cash flows once the asset has been replaced should be lower than the outward cash flows prior to replacement. However, there are intangibles such as safety and operational efficiency that may not be easily quantified but need to be considered as part of the justification.

Renewal and Replacement Programs

Groups of assets may have their economic life determined by a renewal or replacement program date rather than the SEL. The program effectively overrides the technical life assumption as a shorter economic life has been placed on the asset.

A number of economic and safety matters may have induced management to undertake the replacement program within a lesser time frame rather than the original replacement protocol. However for valuation purposes, the factors have to clearly demonstrate that the renewal or replacement program is necessary.

Generally, where a particular asset is retired early from service because it becomes redundant as part of the planned development of the system, this should not be taken into account in assessing the remaining life of the asset. However, where a class of assets is routinely replaced as part of the evaluation of the system before its technical life expires, then this should be taken into account in assessing the SEL for that class of assets.

The renewal or replacement period should be supported by a benefit-cost analysis as described above.

The effective lives of assets should be set to take into account the optimized renewal date, but it is also important for utilities to understand the changing expectations of their customers, operating license conditions and other regulations that also are liable to impact on these optimal decision points.