• The method should be flexible.
  • The method should apportion to all purposes present at a multiple purpose enterprise a share in the overall economy of the operation.

The TVA group could not agree on whether it was essential that total costs be paid but later groups supported this notion of assigning the full cost among the participants. Thus, the sixth condition would be:

  • The method should apportion the entire cost of the project among the stakeholders.

Large-scale, federally sponsored water development after World War II brought attention to the need to develop cost allocation methods for water projects. The "separable costs, remaining benefits" (SCRB) method originated in this initiative (Federal Interagency River Basin Committee, 1950). A separable cost is the incremental cost of adding group i as the last member of a large coalition of N members. If economies of scale exist, a group incurs the lowest incremental cost if it joins last. If group i cannot pay at least its separable cost, then it will have to be subsidized by the other groups. In the SCRB method, each group is assigned separable costs—that is, the cost it would incur if it joined last, which will likely be less than if it was an original member of the coalition. The remaining nonseparable costs are then apportioned based on each stakeholder's share of the total remaining benefits. Independent of the water resources field, game theorists have pondered the same questions of efficiency and equity using cooperative n person game theory (Aumann and Hart, 1994). Young (1994b) provided an explanation of game theory and cost allocation. Interestingly, the game theorists independently arrived at the same conclusions as did the professionals who evaluated the TVA problem (Heaney and Dickinson, 1982).

Importance of Context

For every cost allocation problem, it is essential to clearly define the context within which the calculations will be done. There is no single correct way to determine and allocate costs. However, some useful guidelines regarding the importance of context do exist. For example, Nelson (1995) describes various ways to determine System Development Charges (SDCs) for water, wastewater, and stormwater systems. SDCs are one-time charges paid by new system development to finance the construction of public facilities needed to serve it. Nelson (1995) describes the legal and other issues that have arisen in trying to establish "fair" charges for new developments. These lessons are applicable to financing watershed organizations.



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